RECENT  PROPOSALS  FOR  RAILROAD  LEGISLATION 

BY 

CLARENCE  CHARLES  HERRMANN 
B.  S.  University  of  Illinois,  1920. 


THESIS 

Submitted  in  Partial  Fulfillment  of  the  Requirements  for  the 

Degree  of 

MASTER  OF  SCIENCE 
IN  ECONOMICS 

IN 

THE  GRADUATE  SCHOOL 

OF  THE 

UNIVERSITY  OF  ILLINOIS 
1922 


. 


\ ^ UL-  L*— 

VVdTS 

UNIVERSITY  OF  ILLINOIS 


THE  GRADUATE  SCHOOL 


I HEREBY  RECOMMEND  THAT  THE  THESIS  PREPARED  UNDER  MY 


BE  ACCEPTED  AS  FULFILLING  THIS  PART  OF  THE  REQUIREMENTS  FOR 


Head  of  Department 


Recommendation  concurred  in* 


Committee 

on 

Final  Examination* 


*Required  for  doctor’s  degree  but  not  for  master’s 


I , , 

■■  . I 


- 

•••• 

, . 


, •’ 


CONTENTS. 


CHAPTER  I 

1. 

2. 


CHAPTER  II 

1. 

2. 


3 . 


CHAPTER  III 

1. 

2. 

3. 

4. 


t; 

iy  • 


b. 


7. 


INTRODUCTION. 

A very  "brief  smart) ary  of  the  war  period  and  federal  control. 

The  Proposals  submitted  to  the  Senate  Committee  on  Interstate 
Commerce  from  January  to  October,  1919. 

HISTORICAL  DEVELOPMENT  OF  THE  RAILROADS  OF  THE  UNITED  STATES. 

The  early  railroad  period  in  the  United  States  - a period  of  very 
rapid  development. 

State  and  Federal  legislation  previous  to  1887. 

The  two  types  of  state  commissions. 

Federal  legislation  previous  to  the  Act  to  Regelate  Commerce. 
Federal  legislation  after  1887. 

The  provisions  of  the  Interstate  Commerce  Act. 

The  amendments  of  1303,  1906  and  1910. 

A few  of  the  more  outstanding  defects  of  restrictive  legislation 
up  to  1914. 

THE  PECULIARITIES  OF  THE  RAILROAD  CORPORATION. 

Horizontal  development  of  the  railroad  company. 

The  railroad  company  not  of  the  pliant  type. 

The  railroad  company  must  be  treated  as  a natural  monopoly. 

Price  for  railroad  service  is  dependent  on  law  of  increasing  re- 
turns; the  lav;  of  joint  costs. 

Co-operation  necessary  and  essential. 

Effects  of  periods  of  depression  and  prosperity. 

It  is  impossible  to  compare  European  governmental  methods  of 
regulation  with  the  methods  to  be  employed  in  the  regulation  of 
our  transportation  system. 


8.  Distinctive  characteristics  of  the  American  railroad  r-r,,-r:any. 


Digitized  by  the  Internet  Archive 
in  2015 


https://archive.org/details/recentproposalsfOOherr 


CHAPTER  IV  THE  PROPOSAL  OF  THE  ASSOCIATION  OF  RAILVIAY  EXECUTIVES. 

1.  General  Statement. 

2.  Method  of  federal  control. 

3.  Rate  making  policy. 

4.  Financial  Regulation. 

5.  Type  of  Ownership. 

6.  Provisions  for  consolidation  and  competition. 

7.  Federal  Incorporation. 

8.  Labor  Conditions. 

CHAPTER  V THE  PROPOSAL  OF  THE  INTERSTATE  COMMERCE  COMMISSION. 

1 . General  Statement . 

2.  Method  of  federal  control. 

3.  Rate  making  policy. 

4.  Financial  Regulation. 

5.  Type  of  Ownership. 

6.  Provisions  for  consolidation  and  competition. 

7.  Federal  Incorporation. 

8.  Labor  Conditions. 

CHAPTER  VI  THE  PLAN  OF  THE  NATIONAL  ASSOCIATION  OF  OWNERS  OF  RAILROAD 
SECURITIES. 

1.  General  Statement. 

2.  Method  of  federal  control. 

3.  Rate  making  policy. 

4.  Financial  Regulation. 

5.  Type  of  Ownership. 

6.  Provisions  for  consolidation  and  competition. 

7.  Federal  Incorporation. 

8.  Labor  Conditions. 


CHAPTER  VII  THE  PLAN  OF  THE  SENATE  COMMITTEE  ON  INTERSTATE  COMMERCE. 

1.  General  Statement. 

2 . Method  of  federal  control. 

3.  Rate  making  policy. 

4.  Financial  Regulation. 

5.  Type  of  Ownership. 

6.  Provisions  for  consolidation  and  competition. 

7.  Federal  Incorporation. 

,8.  Labor  Conditions. 

CHAPTER  VIII  THE  PLAN  OF  THE  CITIZENS  NATIONAL  RAILROAD  LEAGUE. 

1.  General  Statement. 

2.  Method  of  federal  control. 

3.  Rate  making  policy. 

4.  Financial  Regulation. 

5.  Type  of  Ownership. 

6.  Provisions  for  consolidation  and  competition. 

7.  Federal  Incorporation. 

8.  Labor  Conditions. 

CHAPTER  IX  THE  PLAN  OF  THE  NATIONAL  TRANSPORTATION  CONFERENCE. 

1.  General  Statement. 

2.  Method  of  federal  control. 

3.  Rate  making  policy. 

4.  Financial  Regulation. 

5.  Type  of  Ownership. 

6.  Provisions  for  consolidation  and  competition. 

7.  Federal  Incorporation. 

8.  Labor  Conditions. 


• . . 

. 


• 

. 

• 

< 


CHAPTER  X THE  PLUMB  PLAIT. 

1.  General  Statement. 

2.  Method  of  federal  control. 

3.  Rate  making  policy. 

4.  Financial  Regulation. 

5.  Type  of  Ownership. 

6.  Provisions  for  consolidation  and  competition. 

7.  Federal  Incorporation. 

• 8.  Labor  Conditions. 


CHAPTER  XI  CONCLUSIONS. 


1.  Other  proposals  not  given  complete  consideration. 

2.  A general  summarization. 


I 

INTRODUCTION 

Beginning  with  1914  the  effects  of  the  great  world  conflict  began  to  be 
felt  in  the  United  States  and  became  continuously  more  noticeable  in  1915-16. 
There  was  an  actual  decline  in  traffic  in  these  latter  two  years  due  to  the  fact 
that  the  European  countries  were  not  making  purchases  from  our  manufacturers 
because  .of  the  utilization  of  the  surplus  commodities  which  they  held  in  their 
respective  countries — furthermore  Asiatic  and  South  American  countries  were  un- 
able to  buy  from  us  because  it  was  difficult  to  secure  the  services  of  water 
transportation  companies  and  because  credit  relationships  were  difficult  to 
establish.  During  the  early  months  of  191?  heavy  purchases  began  to  pour  in 
from  Eurojje  for  materials  which  were  needed  for  the  promotion  of  the  war. 

The  United  States  declared  war  on  Germany  April  6,  1917,  and  from  that 
time  on  it  was  necessary  to  take  care  of  our  own  needs,  not  only  for  the 
supplying  of  the  materials  of  war  but  providing  as  well  for  the  mobilization 
of  troops.  The  declaration  providing  for  Federal  Transportation  Control  was 
issued  by  President  Woodrow  Wilson  December  26,  1917;  the  actual  operation 
became  effective  January  1,  1918,  and  continued  until  March  1,  1920.  It  is 
interesting  to  note  that  the  United  States  was  the  only  important  nation  to 
take  part  in  the  world  conflict  that  did  not  immediately  assume  federal  con- 
trol of  the  transportation  systems.  V/e  can  account  for  the  delay  in  a number 
of  different  manners;  the  feeling  that  the  private  operators  could  successfully 
handle  the  problem;  the  spirit  of  individualism  of  the  general  public;  the 
feeling  among  many  people,  including  legislators,  that  the  participation  of 
the  United  States  in  the  war  would  be  only  contributary  and  amount  only  to 
complementary  aid  such  as  the  furnishing  of  food  supplies  and  equipment. 


. 


' 

. 


. 


■ 


2 


Th«  period  of  government  control  shall  not  "be  taken  up  as  to  management  or 
procedure  — rather  attention  shall  he  concentrated  on  the  period  of  transition 
from  federal  control  hack  to  private  management. 

Luring  the  period  of  the  world  conflict  the  war  experiences  instituted 
the  necessity  for  the  passage  of  immediate  legislation  of  a particular  type  to 
take  care  of  the  war  needs.  There  was,  however,  a broader  and  as  pressing  a 
problem  to  settle  to  provide  for  permanent  legislation  for  the  American  rail- 
road system — President  Wilson  realized  this  necessity  in  his  message  to  Congress 
made  December  7 when  he  recommended  that  "a  commission  of  inquiry  to  ascertain 
by  a thorough  canvass  of  the  whole  system  whether  our  laws  as  at  present  framed 
l and  administered  are  as  serviceable  in  the  solution  of  the  problem11  be  estab- 
lished. The  recommendation  was  followed  out  in  the  formation  of  the  ITewlands 
Committee  formed  July  20,  1916,  A few  hearings  were  heard  by  this  committee 
but  the  wartime  problems  prevented  a thorough  consideration  of  the  conditions 
or  a complete  determination  of  a permanent  policy.  Peace  had  not  been  long 
signed,  when  it  became  necessary  to  decide  upon  a definite  program  to  be 
followed  out  subsequent  to  Federal  control.  On  December  11,  1918,  Director- 
General  McAdoo  made  his  proposal  for  a continuation  of  Federal  control  for  a 
period  of  five  years}  A.  flood  of  objections  were  set  up  to  his  proposal, 
taking  form  in  counter  plans  devised  for  the  solution  of  the  railroad  problem. 

The  present  discussion  is  concerned  with  an  analysis  of  seven  typical 
plans  that  were  presented  to  the  Senate  Committee  on  Interstate  Commerce  in 
this  period.  The  hearings  were  begun  January  3,  1919,  and  concluded  October 
23rd  of  the  same  year.  Some  features  of  the  plans  are  represented  in  the 
Transportation  Act  of  1920  but  a large  number  represent  proposals  that  shall 
be  made  a part  of  future  legislation. 

1 I.  L.  Sharfrnan,  The  American  Railroad  Problem,  p.  358. 

- 


- I 


■ 

- 


II 

HISTORICAL  DEVELOPMENT  OF  THE  RAILROADS  OF  THE  UNITED  STATES. 


3 


The  progression  of  railroad  development  in  the  United  States  has  proceeded 
along  lines  without  parallel  nor  is  comparison  permitted  with  the  ascendancy 
of  any  other  industrial  program,  or  with  the  railroad  program  as  it  has  evolved 
in  Great  Britain,  Germany  or  any  other  important  nation  of  the  world  which  has 
Been  subjected  to  the  trials  brought  about  by  the  complexities  of  an  indus- 
trial era  dating  from  the  industrial  revolution  in  England  and  followed  by 
similar  periods  in  other  commercial  countries.  Our  procedure  in  the  building 
of  railroads  had  not  been  at  all  controlled  by  economic  needs  or  credit 
propriety  until  an  approximate  date  which  we  might  set  in  the  year  1900.  Up 
to  that  time  we  witnessed  a period  of  unrivalled  railroad  construction  un- 
retarded by  industrial  or  social  needs. 

Except  for  a very  brief  period  from  182?  to  1835,  our  railroad  charters 
had  been  free  from  confining  or  restricting  clauses  becau.se  our  political 
unities  wanted  railroad  building  to  continue  without  retardation  by  state 
regulation.  The  early  charters  were  somewhat  restrictive  in  type  because  they 
represented  a substitution  for  the  charters  of  the  turnpike  and  canal  companies. 
It  did  not  require  a long  time  to  determine  that  the  new  program  was  more  than 
a mere  betterment  of  state  traffic;  rather  that  it  provided  a means  for  the 
economic  development  of  the  middle  west  and  thereafter  the  political  unifica- 
tion of  the  area  beyond  the  Mississippi  River.  Hot  only  were  railroads  given 
free  reign  to  build  up  systems,  but  they  were  directly  aided  by  the  United 
States  government,  and  the  various  states  as  well,  in  the  form  of  enormous  land 
grants,  security  guarantees,  money  subsidies  and  bond  gifts.  The  localities 
in  the  immediate  proximity  of  the  roads  bought  the  speculative  security 


■ 


' 


4 

offerings  of  the  companies  without  consideration  of  earning  capacity  or 
potential  possibilities,  so  anxious  were  they  to  be  served  by  the  carriers. 
Competition  between  localities  resulted  in  terminal  site  donations  to  the  new 
companies  also.  Compare  this  progression  in  the  United  States  with  the  care- 
fully devised  French  program  in  which  the  entire  country,  even  to  the  least 
important  political  department,  had  its  railroad  procedure  determined  in  ad- 
vance by  a capable  group  of  French  engineers  who  had  been  carefully  trained  at 
the  icole  des  Ponts  et  Chausees  in  Paris! 

A railroad  system  so  rapidly  developed  could  not  escape  the  many  dis- 
crepancies occasioned  by  so  hasty  a procedure.  Lines  were  built  through 
localities  offering  the  largest  land  grants;  the  promoters  were  often 
financiers  (not  skilled  railroad:  men)  who  carried  on  their  promotions  for  a 
personal  remuneration  without  regard  for  the  public  which  they  were  obligated 
to  serve;  no  regard  was  given  to  economic  needs  or  to  the  potential  possi- 
bilities of  industrial  or  extractive  occupational  development.  Even  the 
states,  especially  in  the  Middle  West,  could  not  keep  out  of  the  rush  for  the 
building  of  railroads.  Upon  finding  that  their  roads  would  not  pay  well  or 
that  their  funds  were  insufficient  to  complete  the  roadway  to  a contemplated 
terminal,  the  states  were  forced  to  dispose  of  their  holdings  at  a figure 
often  far  below  cost  to  please  their  disgruntled  constituency. 

We  note,  then,  an  unrestrained  period  up  until  about  1870  in  which  no 
state  regulation  was  placed  on  the  development  of  the  railroad  carriers. 
Provisions  were  not  made  even  for  the  repayment  of  loans  made  by  the  United 
States  government  and  only  considerable  consternation  from  conservative  legis- 
lators brought  about  the  passage  of  the  Thurman  Act  in  1878  providing  for  the 

o 

establishment  of  sinking  funds  to  meet  obligations  due  the  governments 

1 Hadley,  Railroad  Transportation,  p.  189. 

2 Johnson  and  Van  Metre,  Principles  of  Hailroad  Transportation,  p.  461. 


. 


. 


> 


- 


5 

Finally  in  1895  the  railroads  were  required  to  make  a settlement;  the  more 
successful  roads  were  able  to  make  payment  in  full  but  in  a great  number  of 
cases  the  government  suffered  large  losses.  States  likewise  made  their  loans 
with  no  strings  attached  only  to  find  collection  almost  impossible  in  a later 
period.  The  large  land  grants  were  made  too  freely — we  cannot  but  admit  that 
some  land  gifts  were  necessary  to  encourage  the  more  hazardous  undertakings 
but  the  prolific  offerings  of  some  of  the  western  states  cannot  be  justified. 
The  squandered  usuage  of  an  often  unappreciated  assistance  would  have  provided 
many  a desirous  home seeker  with  a fertile  field  for  an  essential  economic  pro- 
duction. Instead,  we  have  many  a wonderful  example  (especially  in  the  South- 
west) of  a monument  of  over-expansion  in  industrial  unwarranted  progress. 

In  England  railroads  were  merely  substituted  for  waterways  and  canals 
for  the  sake  cf  expediency — because  they  made  possible  a greater  efficiency 
and  a speedier  distribution,  or  because  they  completed  a transportation  system 
in  its  entirety.  The  channels  of  trade  had  already  been  established,  the 
important  commercial  cities  were  already  flourishing;  accordingly,  no  element 
cf  speculation  existed,  security  was  pronounced  and  there  was  no  need  for  a 
state  stimulant.  On  the  contrary,  regulation  was  required.  The  French 
early  development  has  been  briefly  mentioned  in  a previous  paragraph.  Germany 
and  Italy  have  experienced  some  difficulty  because  their  lines  were  first 
developed  to  meet  the  needs  of  the  small  independent  states,  but  even  there  we 
do  not  find  an  undue  e:<pansion. 

Contrast  then  our  own  progression — railroads  developed  not  concurrently 
with  economic  needs  but  far  in  advance  of  industrial  development.  Railroad 
development  at  that  time  was  very  desirable  and  economically  necessary  yet  it 
should  have  been  carried  on  in  accordance  with  a natural  response.  It  is 
true  that  there  existed  a paucity  of  capital  and  the  problem  of  attracting 


I 


* 


. 


. 


. 


i i **  • ■ V 8 ' 


6 

funds  might  have  been  difficult  but  the  willingness  of  our  governmental  forces 
to  give  aid  was  entirely  unwarranted. 

To  be  sure,  the  New  England  states  and  the  East  generally  was  not  subject 
to  the  excresent  features  of  the  western  development.  There  the  construction 
ha;d  gone  on  more  as  in  England — the  courses  of  traffic  were  already  located 
and  important  cities  were  already  established.  Furthermore,  eastern  super- 
visory commissions  were  formed  as  early  as  1839  in  Pdiode  Island  and  soon  there- 
after in  other  eastern  states  so  that  regulation  went  on  concomitantly  with 
railroad  building  and  there  was  no  opportunity  for  the  disagreeable  features 
to  creep  into  the  eastern  program  of  transportation  development.  However, 
even  there  financial  mismanagement  was  rife  as  we  note  even  recently  in  the 
case  of  the  New  York,  New  fjaven  and  Hartford  Railroad  Company.  Also,  the 
number  of  reals  and  the  total  mileage  in  that  eastern  area  is  very  small  in 
the  aggregate  comparison  with  the  total  railroad  mileage  of  the  United  States. 

The  defects  resulting  from  this  rapid  expansion  in  railroad  advancement 
brought  on  a number  of  problems  and  grievances  which  might  briefly  and  broadly 
be  enumerated  as  follows: 

(l)  An  unnecessary  duplication  of  lines  in  many  territories  and  the 
provision  of  facilities  far  beyond  the  needs  in  certain  communities. 

(d)  A development  accorded  to  the  shippers  offering  the  greatest 
attractions  rather  than  along  proper  trade  channels. 

(3)  An  undue  discrimination  at  non-competitive  points. 

(4)  Insufficient  services  to  shippers  least  able  to  pay  rates  because 
of  the  nature  of  their  commodities-. 

(5)  Discrimination  likewise  against  localities  and  other  carriers. 

(6)  Outstanding  cases  of  "stock  watering”,  often  with  seemingly  sufficient 


t 


7 

justification.  Many  operators  issued  stock  in  amounts  beyond  the  needs  of 
their  investment  because  they  felt  that  potential  earnings  would  justify  their 
methods,  only  to  find  that  their  anticipations  had  been  erroneous  and  that 
stock  was  outstanding  far  beyond  the  amount  of  their  investments.  In  the 
majority  of  cases,  however,  the  financial  disorders  were  duly  contemplated  and 
proposed  to  lower  stock  values  so  as  to  make  possible  purchases  by  a few 
speculators  at  a low  figure. 

(7)  A group  of  managers  who  were  more  familiar  with  financial  affairs 
than  with  the  problems  and  peculiarities  of  railroad  management. 

(8)  An  entire  lack  of  state  or  national  regulation  over  railroad  develop- 
ment . 

The  extension  of  these  discrepancies  with  increasing  regularity  aroused 
the  ire  of  a displeased  public  until  eventually  we  find  an  organization  of  the 
groups  which  had  been  most  extensively  discriminated  against.  The  Grange  was 
foremost  among  the  early  movements  to  institute  in  formal  action  the  complaints 
of  their  greivances.  It  is  evident  that  the  opposition  should  have  started 
from  the  agricultural  interests  because  it  was  in  the  non-competing  farming 
communities  that  the  outstanding  discriminations  had  been  carried  on.  The 
Grange  movement  had  been  started  in  the  late  sixties  for  another  purpose 
entirely,  namely,  to  provide  for  farm  improvement,  to  establish  a more  desirable 
social  community  and  to  promoto  farm  activities  especially  production.  It 
did  not  require  a long  time,  however,  to  so  arrange  the  functioning  of  the 
Grange  to  provide  for  political  agitation  against  the  unjustifiable  discrimina- 
tions. As  early  as  1868  and  18S9  we  have  "grange ” legislation  which  provided 
for  a restrictive  and  severe  railroad  control  through  the  establishment  of 
very  powerful  mandatory  railroad  commissions.  The  first  Illinois  Commission 


. 


* 


. 


was  organized  in  1871,  Minnesota  1873,  Wisconsin  1874  and  Iowa  1877,  and  other 
middle  western  states  followed  in  regular  order.  A large  number  of  the 
regulations  had  to  be  retracted  because  of  their  severity  which  in  some  cases 


8 


made  railroad  operation  impossible.  The  crisis  of  1873  was  far-reaching  and 
affected  the  carriers  as  much  as  it  did  other  industrial  and  manuf' acturing  con- 
cerns. The  western  commissions  would  have  been  more  successful  had  they 
gone  through  a period  of  evolution  with  chronological  adoption  of  regulation 
with  needs  as  indicated  by  the  ensuance  of  time  rather  than  by  the  immediate 
adoption  of  exceptionally  strict  and  confining  authority.  By  1913  all  of  the 
state  commissions  had  become  mandatory  in  type.  It  is  interesting  to  note 
that  the  Massachusetts  commission  remained  of  the  advisory  type  up  to  this 
time.  The  change  was  not  brought  about  earlier  because  this  particular  body 
had.  been  very  successful  in  securing  the  aid  of  public  opinion  in  the  enforce- 
ment of  its  decisions,  thereby  making  unnecessary  mandatory  regulation. 

It  might  be  well  to  note  a brief  consideration  of  national  legislation. 

As  early  as  1870  there  was  an  insistent  demand  for  national  regulation  for 
very  much  the  same  reason  that  state  regulation  had  been  demanded.  The 
agitation  became  more  defined  and  noticeable  and  regular  as  conflicts  became 
apparent  as  to  the  respective  authorities  of  the  various  state  commissions. 

Not  only  did  differences  exist  because  the  various  states  enforced  their 
regulations  with  varying  degrees  of  leniency  or  severity,  but  they  failed  to 
settle  in  a common  manner  the  outstanding  difficulties — the  powers  of  3ome  of 
the  state  commissions  were  much  more  inclusive  than  those  of  the  other  states, 
often  in  the  same  immediate  territory.  Although  there  had  been  previous 
attempts  at  legislation  and  a number  of  Congressional  commissions  had  made 
conclusive  reports  on  the  railroad  problem,  the  first  formal  railroad  bill 


J 


. 


. 

. 


9 

occurs  in  the  Act  to  Regulate  Commerce  passed  in  1337.  It  provided  for  an 
advisory  commission  of  five  members  and  was  empowered  to  enforce  a number  of 
regulations  the  majority  of  which  had  to  do  with  the  alleviation  of  rate  dis- 
criminations. The  Act  was  not  all  constructive  as  to  the  nature  of  its 
clauses;  as  a matter  of  fact,  none  of  our  national  legislation  can  be  con- 
sidered other  than  regulatory  until  the  Transportation  Act  of  1S20.  The 
Interstate  Commerce  Act  tended  merely  to  cut  down  discriminations — the  powers 
of  the  Commission  were  not  made  toe  comprehensive  because  it  was  a new  ad- 
venture and  measures  that  might  have  been  too  confining  were  not  considered. 
There  were  a large  number  of  the  members  of  Congress  who  otoposed  the  Act  en- 
tirely and  the  first  legislation  accordingly  was  not  especially  extraordinary. 
There  seemed  still  to  be  some  fear  in  the  minds  of  the  legislators  that  they 
might  set  up  a control  that  would  retard  the  progress  of  railroad  development. 

The  Commission  was  successful  through  the  first  few  years  of  its  existence 
primarily  because  it  did  not  attempt  the  more  serious  problems  first,  nor 
eliminate  discriminations  the  settlement  of  which  would  have  been  most  irritable 
to  the  carriers.  Likewise,  the  carriers  were  not  unwilling  to  abide  by  the 
rulings  of  the  Commission  on  the  minor  decisions.  Furthermore,  it  is  usually 
true  that  the  general  public  is  satisfied  with  any  new  legislation  because  it 
is  usually  assured  that  an  entire  problem  has  been  cared  for  in  any  legislative 
act,  irregardless  of  its  importance  or  the  extent  of  its  provisions. 

A period  of  years  elapse  before  the  discriminations  again  become  apparent. 
As  early  as  1892  or  93  there  were  more  demands  for  more  legislation  but 
Congress  was  engaged  in  other  fields  and  in  the  settlement  of  other  problems. 

Trie  construction  of  the  Panama  Canal  was  in  progress  and  treaties  had  to  be 
made  with  Great  Britain  (Hayes-Pauncefote  treaty)  and  other  nations.  The 


. 


. 


10 

Span! sh-Amer lean  War  occurred  in  this  same  period;  the  panic  of  1893  affected 
the  railroads  to  some  extent  arid  drew  forth  a flood  of  sympathy  which  held 
back  Congressional  legislation  for  a time.  Furthermore,  the  railroads  had 
developed  a powerful  lobby  which  was  effective  in  preventing  governmental 
action. 

The  demands  became  urgent  after  1900  with  a period  of  rising  prices,  the 
development  of  monopolies,  and  the  reappearance  of  personal  discriminations, 
as  well  as  locality  and  interline  carrier  discriminations.  The  Elkins  Act 
of  1S03  took  care  of  the  latter  conditions  but  still  left  glaring  defects, 
very  few  of  which  had  been  cared  for  in  the  original  act.  A continuation  of 

demands  led  to  a second  and  more  important  amendment  in  the  Hepburn  Act  of 
1906  which  widened  the  scope  of  the  Commission' s authority  and  gave  them 
broader  powers.  It  is  noticeable  that  after  1906  the  courts  attitude  toward 
the  decisions  of  the  Commission  is  decidedly  changed,  in  that  they  confine 
themselves  to  legal  rather  than  economic  considerations  as  far  as  an  equity 
division  can  reasonably  be  established.  Previous  to  the  passage  of  the 
Hepburn  Act,  the  courts  not  only  reviewed  the  legality  of  the  decisions  as 
determined  by  the  Interstate  Commerce  Commission  but  often  went  further  and 
admitted  new  evidence  or  reconsidered  the  economic  facts  that  had  been  in- 
terpreted originally  by  the  Commission.  1908  marked  the  beginning  of  a 
political  campaign  in  which  both  the  Republican  and  Democratic  parties  had 

important  railroad  planks.  Ex-President  Taft,  the  republican  candidate  at 

*• 

that  time  made  his  outstanding  proposal  a Commerce  Court — a type  of  tribunal 
absolutely  foreign  to  our  court  procedure.  The  Mann-Elkins  Act  of  1910 
represents  the  next  legislation.  It  practically  provided  for  an  unimportant 
political  act  and  the  fulfillment  of  an  election  promise,  yet  new  economic 


* 


• 

• 

• 

. 


. 

» 


11 

circumstances  had  brought  about  a demand  for  new  legislation.  The  problem  of 
rate  increases  now  agitated  the  shipping  jjublic  rather  than  discriminations  and 
provided  the  outstanding  item  in  need  of  correction;  laborers  were  demanding 
an  increased  wage  in  the  first  labor  controversy  3ince  the  Pullman  strike  of 
1894  which  had  been  led  by  Eugene  V.  Debs.  Debates  were  being  made  secretly 
and  the  railroads  wanted  to  be  relieved  of  this  seemingly  necessary  yet  un- 
desirable and  unavoidable  evil.  The  Commerce  Court  was  established  by  the 
Hepburn  Act  only  to  be  abolished  in  1913  because  of  the  very  same  demand  that 
had  brought  about  its  establishment — in  that  the  greater  number  of  its  cases 
were  decided  in  favor  of  the  carriers.  Moreover,  the  Commerce  Court  did  not 
conceive  of  its  true  function;  namely,  that  it  was  to  aid  the  Interstate 
Commerce  Commission  rather  than  check  its  action.  The  Interstate  Commerce 
Commission  demanded  that  the  Commerce  Court  be  discontinued.  The  Hadley 
Commission^  was  also  established  in  this  Act  and  made  the  first  report  of  con- 
trol of  railway  finance.  It  was  very  conservative  in  its  recommendations, 
indicating  that  a well-informed  public  would  wield  a sufficient  influence  and 
control  over  railway  security  issues,  financial  operations  and  capital  ex- 
penditures. 

After  1910  a number  of  minor  amendments  were  passed,  the  most  important 
of  which  were  the  Panama  Canal  Act  passed  in  1912  to  give  the  Commission  con- 
trol over  the  combination  of  railroads  and  waterways,  and  the  1913  amendment 
which  compelled  the  Commission  to  build  up  a complete  financial  record  of  all 
of  the  railroads  inclusive  of  all  changes  as  might  occur  from  time  to  time. 

It  amounted,  then,  to  a thorough  preparation  for  the  Commission  so  that  it 
could  regulate  financial  control  which  is  eventually  brought  about  in  the 
Transportation  Act  of  1920. 

1 So  called  because  of  its  chairman,  President  Hadley  of  Yale  University,  a 
leading  transportation  authority. 


. 


12 

So  far  there  has  been  discussed  the  progression  and  development  of  rail- 
road legislation  up  to  1914,  with  the  emphasis  predominately  on  the  nature  and 
extent  of  government  regulation.  The  regulation  has  been  restrictive  rather 
than  constructive;  problems  have  been  settled  often  by  repressive  acts  with- 
out the  further  institution  of  remedial  measures  to  eliminate  reoccurrences. 

The  attention  of  the  Interstate  Commerce  Commission  has  been  so  far  concentrated 
on  rates  and  regulations  with  a tendency  toward  a preparation  for  an  eventual 
complete  financial  control.  In  some  instances  the  regulations  have  been  too 

restrictive,  in  other  cases  there  has  been  a noticeable  neglect.  Conflicts 
between  the  state  commissions  and  the  Interstate  Commerce  Commission  and  be- 
tween the  judiciary  and  both  commission  powers  still  remain  to  be  settled. 

The  conflicts  in  the  former  instance  have  made  for  difficulty  in  operation  and 
undue  expenditures  on  the  part  of  the  railroad  companies.  The  difficulty  be- 
tween the  Interstate  Commerce  Commission  and  the  various  state  commissions  and 
the  judiciary  has  resulted  in  outright  diverse  decisions  as  far  as  the  settle- 
ment of  railroad  cases  have  been  concerned.  On  one  hand  the  railroads  have 
had  their  rate  charges  controlled  by  the  commissions,  have  had  discriminations 
declared  illegal;  yet,  on  the  other  hand,  carriers  are  not  permitted  to  co- 
operate because  rate  agreements  and  traffic  associations  have  been  subjected 
to  anti-trust  legislation  according  to  the  Supreme  Court  interpretation  of 
the  Sherman  and  Clayton  Acts.  Likewise,  rates  have  been  unduly  kept  down  be- 
cause the  state  and  national  courts  has  often  felt  that  their  function  have 
been  to  act  as  a check  rather  than  as  an  aid  to  the  Interstate  Commerce 
Commission.  There  has  been,  furthermore,  a tendency  for  both  the  courts  and 
the  commissions  not  to  observe  that  the  railroad  corporation  is  of  a peculiar 
type  and  should  be  compared  with  other  corporate  types  in  the  devisiation  of 
legislation.  These  differences  shall  be  taken  up  in  some  detail  in  the 
ch  a ■ - 1 e r wh  i cli  foil  o w s . 


. 


13 

III 

THE  PECULIARITIES  OF  THE  RAILROAD  CORPORATION. 

A great  number  of  transportation  authorities  and  writers  on  public  policy 
of  railroads  have  emphasized  the  fact  that  the  railroad ^corporation,  as  com- 
pared with  the  regular  industrial  corporation,  is  not  nearly  as  efficiently 
managed  in  operation  or  in  finance.  These  discussions  concede  that  the  two 
types  possess  similarities.  However,  there  are  some  remarkable  differences, 
and  without  any  desire  to  justify  a lower  standard  of  railroad  efficiency,  the 
purpose  of  this  chapter  shall  be  to  indicate  some  of  the  more  outstanding 
differences  between  the  two  types.  It  is  decidedly  unjust  to  criticize  a 
railroad  corporation  if  it  has  problems  to  meet  that  are  so  different  and  con- 
ditions of  operation  so  extraordinary  as  to  merit  a more  lenient  or  varying 
consideration  upon  which  to  base  our  criticism. 

In  the  first  instance,  the  railroad  company  is  built  up  horizontally. 

An  enlargement  or  a new  addition  of  roadway  usually  results  in  a large  increase 
in  the  area  controlled  and  management  accordingly  becomes  more  complex  because 
of  a necessary  increase  in  the  managerial  force.  Manufacturing  industries 
(in  the  greater  number  of  cases)  are  built  up  vertically,  and  an  enlarged 
production,  up  to  a certain  maximum,  can  usually  be  carried  on  without  in- 
creasing the  number  or  the  function  of  the  executives.  Indeed,  the  criticism 
might  well  be  supported  that  our  present  agitation  to  throw  systems  together 
to  make  possible  a greater  efficiency  and  a more  substantial  credit  basis  is 
not  well  founded.  It  is  possible  that  our  systems  have  become  so  large  that 
the  point  of  grestest  efficiency  has  been  exceeded  and  that  a more  desirable 
and  efficient  service  could  be  secured  by  segregation  rather  than  by  combination. 


. 


* 


. 

. 


. 


14 

A managerial  force  over  a smaller  unit  would  no  doubt  be  mere  efficient. 

Whether  or  not  credit  would  be  substantiated  or  impaired  presents  another 
problem.  It  might  be  that  a more  efficient  operation  would  increase  the  re- 
turns and  so  ameliorate  credit  conditions.  A new  chain  of  circumstances  must 
still  be  settled,  however.  Railroads  do  not  operate  in  individual  units,  but 
must  work  together  for  the  more  important  shipments  and  the  majority  of  ship- 
ments must  go  over  more  than  one  line  in  reaching  a destination.  Settlements 
would  be  more  cumbrous  and  more  detailed  with  a greater  number  of  participating 
carriers.  A settlement  might  be  effected  by  the  institution  of  one  or  more 
railway  clearing  houses.  The  English  Clearing  House  established  in  1846  has 
ever  since  been  a very  economical  adjunct  to  the  settlement  of  proportional 
charges  and  has  eliminated  a large  number  of  difficulties  which  our  carriers 
experience.  Possibly  our  carriers  have  not  been  willing  to  signify  the 
adoption  of  such  a common  means  of  settlement  because  of  their  individuality 
and  because  so  far  in  our  railroad  history  the  severity  of  competition  and  the 
secluded  methods  of  account  keeping  have  not  made  such  a procedure  permissible. 
The  elimination  of  these  difficulties  by  legislation  in  recent  years  should 
make  such  a program  possible.  There  is  also  a likelihood  that  clearing  houses, 
unless  their  functions  were  very  limited,  would  be  illegal  according  to  court 
interpretations.  However,  if  their  operations  were  clearly  defined  as  having 
to  do  only  with  accounting  and  settlement  functions  there  should  be  no  object- 
ions, for  the  introduction  of  the  clearing  house  as  an  economy  would  have  no 
monopolistic  aspects  if  properly  controlled.  Some  of  our  larger  systems 
operate  clearing  house  organizations  within  their  own  systems  at  the  present 
time  with  a considerable  degree  of  success.  The  Transportation  Act  of  1S20 
contains  a clause  providing  for  a volitional  program  whereby  the  railroads  may 
carry  on  an  even  more  elaborate  combination  providing  the  feature  of  com- 


• fj  . 


' 


. 


15 

I petition  is  not  interfered  with.  But  is  this  clause  applicable  to  the  en- 
tangled problem  presented  by  the  present  conditions  of  our  railroad.3?  Will 
greater  combinations  further  increase  the  complexity  of  the  efficiency  and 
credit  problem?  Will  it  afford  possibly  only  a temporary  relief  and  shortly 
place  our  carriers  in  a position  where  they  will  be  subjected  to  a greater  in- 
efficiency hazard  and  a more  pronounced  credit  pitfall?  The  question  is  merely 
asked,  but  it  is  hard  to  believe  that  we  can  evade  the  probability  suggested 
in  the  latter  part  of  the  question. 

In  the  second  place,  a railroad  is  not  a pliant  institution — a railroad 
once  constructed  cannot  very  well  be  changed  except  for  minor  alterations. 
Contrast  this  circumstance  with  our  regular  industrial  unit.  A manufacturing 
firm  failing  in  an  original  productive  pursuit  can  utilize  its  plant  and  the 
greater  part  of  its  equipment  in  a seemingly  more  remunerative  field,  or  at 
least  find  a fairly  ready  market.  Not  so  of  a railroad — it  must  be  con- 
structed along  a course  which  will  provide  a return  or  stand  as  a pillar  of 
ill-advised  promotion  or  inefficient  management,  financial  or  otherwise. 

The  third  difference  has  some  features  in  common  with  that  just  presented, 
yet  has  enough  differences  to  merit  a separate  consideration.  It  is  often 
remarked  that  a railroad  is  a monopoly.  Trie  observation  must  be  carried  on 
further,  however,  since  the  railroad  corporation  is  a peculiar  type  of 
monopoly;  it  is  more  nearly  an  absolute  monopoly  in  that  it  makes  necessary  a 
greater  outlay  of  capital  to  provide  competition.  It  might  be  well  to  remark 
here  that  in  industry  there  is  no  true  and  lasting  monopoly  except  of  an 
artificial  type — that  which  is  aided  by  the  artificial  means  of  government 
protection;  in  any  other  instance  there  is  always  an  opportune  point  where 
competition  can  enter  in  when  the  price  has  been  set  at  a high  point  or  sub- 
stitution can  be  resorted  to  in  an  effort  to  overcome  the  more  outstanding 


■ 


•• 


16 

monopoly  evils  and  vices.  To  be  sur-j,  the  complexities  of  our  -resent  means 
of  production  with  the  many  incongruities  which  it  engenders  makes  competition 
less  effective.  A commodity  may  start  from  the  producing  point  under  a price 
regulated  "by  the  marginal  producer’s  competitive  measure  yet  "before  it  has 
completed  the  final  round  of  the  various  middlemen  with  their  peculiar , and 
often  unnecessary  functions  to  perform,  there  are  many  opportunities  for 
monopolies  to  enter  in.  Our  so-called  ’’corners”  present  a very  good  example 
of  the  type  of  complexity  mentioned.  A far  more  important  feature  occurs 
in  the  consideration  of  the  manner  in  which  competition  may  be  set  up  to  meet 
a partial  monopoly.  For  purposes  of  obtaining  an  example,  we  may  propose 
that  a monopoly  has  grown  up  in  the  packing  industry.  It  does  not  require 
a great  outlay  of  capital  for  a small  packing  firm  to  be  established  which 
can  compete  at  individual  points  with  the  larger  firm,  although  the  operating 
costs  of  the  newer  firm  may  be  somewhat  higher,  there  would  still  come  about 
the  restriction  of  the  established  packing  monopoly  to  some  extent.  The  case 

of  the  railroad  is  entirely  different.  If  a railroad  has  a monopoly  between 
two  termini  some  one  hundred  miles  apart,  it  requires  the  development  of  a 
new  system  of  corresponding  length  and  with  similar  facilities  and  a capital 
outlay  as  large  to  set  up  a competing  factor.  Moreover,  the  very  magnitude 
of  the  new  proposal  makes  capital  security  issues  a matter  of  some  difficulty, 
especially  when  it  is  realized  that  the  undertaking  is  replete  with  hazards 
and  rernunerative  success  is  not  assured.  Results  are  more  problematical 
when  we  observe  the  type  of  railroad  competition,  since  the  capital  outlay 
cannot  be  transferred  to  another  type  of  industrial  development.  It  is 
essential  to  notice  also  that  it  would  be  impossible  to  set  up  a competing 
unit  at  every  small  station;  in  those  smaller  centers  it  is  possible  for 


. 


17 

the  monopoly  to  -utilize  all  of  its  peculiar  advantages  without  retardation 
unless  by  governmental  restriction. 

In  the  fourth  place,  it  is  to  be  noted  that  the  return  for  the  production 
of  the  service  is  not  determined  by  the  same  factors  that  determine  the  price 
of  goods.  Commodity  price  is  determined  by  two  broad  theories;  either,  by 
the  cost  of  production  or  the  marginal  utility  theory,  or  both.  The  charge 
made  by  the  carrier  cannot  be  determined  in  the  majority  of  cases  by  either 
method — to  be  sure,  there  are  some  commodities  in  which  a freight  rate 
determined  by  the  cost  of  providing  the  service  might  correspond  to  the  amount 
which  the  shipper  is  willing,  able  and  justifiably  should  pay;  yet  the  ins- 
tance is  rare  in  which  the  cost  of  service,  which  is  the  most  desirable 
method  for  the  railroad  company,  can  be  the  sole  determinant.  The  supply 
and  demand  theory  (marginal  utility  theory)  might  apply  to  a degree  were  it 
not  for  the  governmental  restriction  which  controls  the  rate  charge.  Were 
this  latter  theory  to  apply,  then  the  absolute  monopoly  advantage  theory  of 
the  carrier  would  be  permitted  to  play  its  part  in  full.  A great  demand  for 
facilities  would  cause  the  carriers  to  charge  high  rates  but  they  are,  and 
properly  so,  prohibited  from  making  such  a charge  by  statutory  regulation-- 
likewise  a great  supply  might  cause  a low  price  to  be  arrived  at  but 
statutory  regulation  again  interferes,  in  this  instance,  for  the  benefit  of 
the  carrier;  and  rightly  so,  because  of  the  plasticity  of  the  railroad 
corporation  which  makes  it  necessary  that  it  receive  a rate  which  will  be 
sufficient  for  sustenance,  for  the  public  must  be  served  and  railroad  capital 
expenditure  can  not  be  diverted  to  a new  field.  Furthermore , an  over-supply 
of  railroad  facility  is  hardly  possible  .because  of  the  great  capital  outlay 
which  is  required  and  the  undesirability  of  railroad  securities  by  the 


. 


18 


general  public.  This  same  condition  may  apply  to  some  of'  the  smaller  manu- 
facturing industries  but  it  is  not  true  of  the  more  important  industrial 
institutions. 

Another  important  difference  is  that  railroads  are  absolutely  inter- 
dependent and  must  co-operate.  It  is  true  of  other  industries,  that  they  mast 
work  together  as  a group;  the  makers  of  finished  steel  products  are  dependent 
on  the  producers  of  pig  iron  for  instance  but  it  is  not  necessary  for  any 
particular  manufacturer  to  secure  pig  iron  from  any  particular  producer.  Re- 
ferring to  railroad  companies,  certain  carriers  are  compelled  by  physical 
necessity  to  work  together  in  carrying  shipments  to  destination,  and  it  is 
often  not  a matter  of  choice  as  to  what  lines  shall  act  together  in  the  per- 
formance of  the  function. 

Another  difference,  not  absolutely  distinctive  in  the  railroad  field,  yet 
predominating  there,  has  to  do  with  the  theory  of  increasing  returns  and  fixed 
costs.  Every  industry  has  a varying  amount  of  fixed  costs  which  exist  re- 
gardless of  the  amount  of  service  produced  but  they  usually  are  capital  fixed 
expenditures  such  as  interest,  rent,  maintenance,  etc.  In  railroading,  cer- 
tain operating  costs  are  fixed  as  well;  it  costs  nearly  as  much  to  operate  a 
"pull”  of  empty  cars  as  a loaded  train;  up  to  carrying  capacity  of  any  in- 
crement of  equipment  there  is  no  great  difference  in  operation  costs.  Accord- 
ingly there  is  a tendency  for  every  railroad  company  to  compete  for  traffic 
up  to  the  maximum  capacity  of  their  equipment,  until  eventually  the  corniest  it  ion 
causes  the  railroad  to  be  operating  at  a loss  or  to  co-operate  with  other 
carriers  serving  in  the  same  community.  We  may  also  notice  that  railroads 
are  subject  to  the  law  of  joint  costs;  i.e.  it  is  not  possible  for  the 
railroad  to  determine  the  exact  charges  applicable  to  any  particular  shipment. 


The  cost 3 apply  jointly  to  all  goods  carried  and  cannot  "be  allocated  to  a 
particular  commodity;  accordingly  when  carriers  begin  to  cut  rates,  there  is 
no  method  of  determining  for  any  particular  rate  deduction  whether  or  not  the 
actual  cost  for  carrying  any  one  commodity  has  been  taken  care  of  by  the  new 
rate  established.  Eventually  the  railroad  company  finds  that  its  income  is 
not  sufficient  to  care  for  operating  and  fixed  costs.  In  manufacturing  in- 
dustries it  is  not  nearly  30  difficult  to  ascertain  costs  for  any  particular 
unit  production  and  accordingly  there  is  not  that  tendency  to  make  price 
quotations  which  are  not  sufficient  to  cover  production  costs. 

Possibly  it  is  not  necessary  to  carry  the  discussion  into  the  considera- 
tion of  the  miner  differences,  yet  there  is  at  least  one  other  feature  which 
merits  consideration,  that  which  has  to  do  with  the  effect  of  periods  of  de- 
pression and  prosperity  upon  the  railroad  company.  Not  all  critical  periods 
affect  industries  in  general  yet  every  such  period  is  effective  in  the  case 
of  the  carrier  because  it  decreases  the  amount  of  goods  that  is  presented  to 
the  railroad  company,  and  the  effect  is  doubly  noticeable  when  we  reconsider 
that  carriers  are  subject  to  the  law  of  decreasing  costs.  An  industrial 
concern  could  lower  its  operating  costs  during  the  period  of  depression  and 
not  be  required  to  accept  such  large  losses. 

Though  not  quite  consistent  with  the  subject  matter  of  this  chapter,  yet 
possibly  not  important  enough  to  bear  discussion  in  a separate  division,  is 
the  method  employed  by  some  writers  in  comparing  so  extensively  the  European 
railroad  problem  and  means  of  settlement  with  those  employed  in  our  own 
country.  To  be  sure,  we  are  able  to  derive  some  conclusions  from  the 
European  method  of  handling  the  problem,  yet  we  cannot  evade  the  point  that 
there  are  so  many  more  differences  than  similarities  that  any  important  con- 


■ 

. 


. 


. 


20 

elusions  that  we  might  draw  might  not  possibly  he  helpful  in  our  case. 

To  note  a few  of  the  distinctive  differences,  it  might  first  be  mentioned 
that  the  economic  conditions  in  the  smaller  European  countries  are  not  nearly 
as  varied  as  are  the  conditions  in  the  broad  and  unevenly  but  rapidly  progress- 
ing divisions  of  the  United  States.  Our  east,  and  to  some  extent,  our  middle 
west  are  important  in  the  manufacturing  industries  and  accordingly  there  is  a 
uniform  demand  for  railroad  equipment,  a series  of  short  hauls,  many  important 
cities  and  many  complex  terminal  problems.  The  south  is  agricultural;  the 
railroads  must  meet  a seasonal  demand  for  equipment,  settle  the  problem  of  one- 
way traffic  and  set  up  a competition  to  meet  the  waterways.  A somewhat 
similar  condition  prevails  in  the  west.  Southern  traffic  is  predominately  in 
one  direction;  the  predominance  being  from  the  south  to  northeast  during  the 
cotton  season,  and  from  the  north  to  the  south  for  the  carrying  of  food  pro- 
ducts from  the  middle  west. 

Any  laxity  in  European  railroad  progression  is  overcome  by  the  possibility 
of  utilization  of  waterway  facilities.  Germany  and  the  Lowland  countries  have 
extensive  waterways  which  relieve  the  railroads  of  the  carrying  of  the  bulkier 
commodities  and  the  less  valuable  articles  where  cost  of  transportation  is  a 
more  important  consideration  than  rapid  delivery.  The  lack  of  waterway 
development  in  the  United  States  has  shifted  to  the  railroads  the  responsibility 
of  carrying  all  commodities  presented  in  accordance  with  economic  or  industrial 
progression.  There  is  ample  opportunity  in  the  United  States  to  develop 
waterways  if  a proper  program  is  devised;  in  recent  years  agitation  for 
Mississippi  River  and  Great  Lakes  traffic  has  become  urgent.  The  improvement 
of  water  channels  would  relieve  the  railroads  of  the  heavy  hauling  and  accord- 
ingly have  the  good  effect  of  relieving  the  periodically  recurring  congestion 
in  terminals. 


• < 


21 

The  spirit  of  the  .American  railroad  entrepreneur  has  not  yet  indicated 
that  service  to  the  public  is  the  principal  guiding  determinant  in  railroad 
operation.  There  is  still  the  tendency  to  operate  the  roads  for  the  benefit 
of  personal  interest  instead,  a peculiar  tendency  of  Aimer  lean  industry 
generally  which  has  caused  it  to  be  rather  inefficient  and  not  as  progressive 
as  it  might  have  been  if  personal  remuneration  were  a less  dominant  character- 
istic. Subsequent  years,  with  a reasonable  amount  of  government  regulation 
and  a decreasing  possibility  of  appropriation  of  the  national  wealth,  will  no 
doubt  make  it  necessary  for  the  successful  manager  of  industry  to  apply  him- 
self to  the  provision  of  an  efficient  public  service  rather  than  to  the  ex- 
ploitation of  industry  for  personal  advantage  and  satisfaction. 

Likewise,  American  government  attempts  at  industrial  enterprise  have  not 
been  most  efficient  although  they  have  not  had  the  opportunity  to  try  a con- 
tinuous operation  during  a period  of  normality.  Our  governmental  attempts 
have  been  at  temporary  opportunities  where  unity  has  been  the  outstanding  re- 
quirement (we  have  a good  example  presented  in  the  Federal  control  of  carriers 
during  the  period  of  the  World  War)  or  in  special  developments  which  have  been 
so  predominately  for  the  public  good  and  so  laden  with  international  responsi- 
bility that  private  enterprise  would  have  succeeded  only  with  great  difficulty 
and  with  only  moderate  assurance  of  a reasonable  return.  A good  example  of 
the  latter  condition  is  afforded  in  the  construction  of  the  Panama  Canal  which 
required  international  treaties  which  the  government  alone  could  negotiate  and 
hazardous  construction  which  only  government  could  justifiably  undertake. 

The  spirit  of  individualism  has  been  most  pronounced  in  the  United  States— 
it  has  been  the  underlying  foundation  of  our  industrial  system,  and,  while 
there  is  at  the  present  time  a tendency  toward  collectivism,  it  is  still  an 


. 

. 


. 


22 


infantile  institution.  Until  it  has  progressed  further,  it  is  not  likely 
that  we  can  expect  our  railroad  policy  to  he  any  other  than  a continuation 
of  regulation.  However,  it  will  no  doubt  be  a changed  type  of  regulation 
in  that  it  will  be  constructive  rather  than  restrictive  with  an  attempt  made 
to  eliminate  the  conflicts  between  the  judiciary  and  the  Interstate  Commerce 
Commission,  and 'the  various  state  commissions  as  well.  It  must  present  a 
broad  general  railroad  policy  which  will  provide  for  agreeable  consideration 
of  the  general  public  in  the  charges  that  are  made  for  transportation,  of  the 
operators  and  security  holders  so  that  a.  reasonable  return  will  accrue  to  them 
j for  their  application  of  effort  and  investment  risks,  and  to  the  railroad 
workers  so  that  they  may  labor  under  desirable  working  conditions  and  receive 
a remuneration  which  will  make  it  possible  for  them  to  maintain  an  acceptable 
standard  of  living.  Our  restrictive  regulation  has  cared  for  an  immediate 
problem  but  in  that  settlement  has  not  considered  the  relation  or  effects  of 
the  regulations  as  they  are  effective  on  other  concomitant  relationships. 

Other  rather  important  differences  might  be  added  to  the  citation; 
especial  mention  should  come  to  the  magnitude  of  complexities  which  exists  in 
our  transportation  system  presented  in  numerous  terminal,  operation,  and 
train  service  problems  which  do  not  exist  in  Europe  because  of  the  small 
number  of  systems  that  enter  any  particular  terminal  and  the  relatively  smaller 
total  mileage  of  any  particular  nation. 

It  has  been  the  purpose  of  this  chapter  to  establish  two  important  sets 
of  conclusions:  (l)  that  the  railroad  industry  represents  more  nearly  an 

absolute  and  natural  monopoly  than  any  other  large  industry  and  accordingly 
cannot  be  subjected  to  the  laws  of  competition  without  meeting  with  destruction; 
(2)  that  the  European  railroad  problem  is  so  entirely  different  from  ours  that 


. 


* 


. 


. 


23 


any  extensive  attempt  to  make  an  application  of  common  means  of  settlement 
would  not  be  beneficial  or  fruitful. 

The  seven  subsequent  chapters  take  up  in  detail  seven  proposed  plans 
which  have  been  set  forth  for  railroad  legislation. 


* 


' 


24 


IY 

THE  PROPOSAL  OF  THE  ASSOCIATION  OF  RAILWAY  EXECUTIVES. 

When  the  demand  for  the  return  of  the  railroad  companies  to  the  private 
owners  became  imminent,  we  find  the  railway  executives  supporting  most 
actively  a plan  which  should  represent  the  principles  providing  for  government 
regulation  of  carriers  with  only  moderate  deviations  from  the  policies  which 
had  been  pursued  previously.  It  was  known  as  the  proposal  of  the  Association 
of  Railway  executives  and  was  presented  by  Mr.  Thomas  DeWitt  Cuvier,  president 
of  the  Association,  to  the  Senate  Committee  on  Interstate  Commerce.  It  was 
vigorously  supported,  as  might  be  expected,  since  its  originators  represented 
over  ninety  per  cent  of  the  total  railroad  mileage  of  the  United  Statesi 
To  speak  broadly,  it  might  be  called  a very  conservative  program  based  on  the 
continuation  of  the  ’’principle  of  private  operation,  ownership  and  management.” 
It  was  constructive,  however,  in  its  proposals,  a rather  definite  departure 
from  programs  previously  presented,  which  have  usually  been  of  a restrictive 
type.  An  enumeration  of  the  separate  clauses  of  the  plan  follows. 

METHOD  OF  FEDERAL  CONTROL. 

It  was  recommended  that  the  Interstate  Commerce  Commission  be  maintained 
with  its  authority  to  pass  on  rates,  regulate  the  accounting  systems  of  the 
carriers  and  to  proceed  with  its  present  plan  for  railroad  valuation  which  had 
been  started  in  1913;  an  amendment  to  the  Act  to  Regulate  Commerce  having 
been  passed  on  March  1st  of  that  year.  The  ability  of  the  Interstate  Commerce 
Commission  in  carrying  out  of  the  powers  and  duties  given  it  by  Congress  has 


never  been  doubted — the  complexities  of  the  problems  it  has  encountered  in  our 
individualistic  United  States  necessitate  a slow  settlement  with  complete 


1 Sharfman,  American  Railroad  Problem,  p.  367. 


. 


‘ 


25 


assurance  that  any  activity  or  policy  will  not  cause  new  difficulties.  How- 
ever, it  has*  often  been  felt  that  the  great  burdens  of  detail  have  made  it  im- 
possible for  the  Interstate  Commerce  Commission  to  be  a great  force  for  con- 
structive progression — it  remedies  faults  and  corrects  outstanding  wants  but 
has  not  the  time  or  the  power  to  build  up  a broad  remedial  program— it  has  not 
been  the  erroneous  action  of  the  commission  but  rather  of  the  government  body 
which  empowers  the  commission;  nor  again  is  it  the  present  or  immediately  pre- 
ceding Congresses  that  have  been  to  blamed  Y,re  cannot  evade  having  in  our  rail- 
road system  at  the  present  some  outstanding  discreijancies  or  outstanding  dis- 
criminations in  an  aftermath  of  so  brief  a period  of  governmental  regulation 
following  that  unprecedented  development  of  railroads  up  to  1900  with  any 
financial,  economic  or  revenue  re-gulation.  A continuous,  far-sighted,  lenient 
supervision  by  governments  from  1830  on  would,  no  doubt,  have  found  the  United 
States  with  a railroad,  system,  possibly  not  quite  as  great  as  the  present  one, 
but  without  all  of  the  undesirable  features. 

In  order  to  make  provision  for  the  need  of  a Federal  group  to  care  for 

the  broader  transportation  problems,  the  plan  of  the  Association  of  Railway 

2 

Executives  recommended  the  establishment  of  a Federal  Transportation  Board  to 
have  three  commissioners  to  be  appointed  by  the  President  to  have  general  super- 
visory power  ever  the  public  interest  and  to  lay  the  foundation  for  the  con- 
structive legislation  for  which  there  seemed  to  be  a very  definite  need.  This 
group  would  work  in  conjunction  with  the  Interstate  Commerce  Commission, 
determining  to  some  extent  its  proposals  and  recommendations  by  the  results 
achieved  by  the  previous  experience  of  the  Commission  as  arrived  at  by  the 
compilations  of  their  records,  but  to  go  further  and  make  independent  re comma n- 

1 Lovett,  Comments  on  the  Railroad  Problem,  p.  34. 

2 Annals  of  the  American  Academy  of  Political  and  Social  Science.  Nov.  1^19 

p.  98.  ’ " ’ 


. 


. 


. 


. 


26 


dations  where  there  had  been  no  correlated  experience  which  could  he  employed 
f'or  a productive  purpose. 

It  is  interesting  to  note  that  other  groups  presented  proposals  with  a 
demand  for  a similar  new  body,  indicating  that  our  railroad  regulation  policy 
has  not  met  with  the  approval  of  those  interested  in  a successful  railroad 
operation  and  that  a new  angle  of  approach  must  be  instituted.  The  Interstate 
Commerce  Commission  opposed  this  new  recommendation,  for  although  there  was 
no  removal  of  its  present  powers,  it  made  impossible  the  addition  of  any  new 
powers  accordingly  causing  the  Commission  to  function  as  a statistical  and 
rate  approving  groaip.  It  is  only  natural,  also,  that  the  Commission  should 
want  these  new  responsibilities  incorporated  within  its  own  powers,  and,  as 
shall  be  noted  later,  it  did  make  such  demands.  It  is  advantageous  to  have 
all  of  the  regulatory  power  in  one  group  provided  that  the  enormosity  of  duties 
does  not  make  impossible  the  fulfillment  of  any  single  duty  or  group  of  duties 
efficiently  and  well.  Two  commissions  having  different  functions  is  desirable 
enough  if  there  is  a sufficient  amount  of  co-operation;  if  not,  there  is  the 
danger  of  a conflicting  and  unsympathetic  relation  which  may  be  detrimental  to 
carriers,  the  general  public,  and  to  all  groups  concerned  in  railroad  operation. 
Such  is  our  own  present  problem  with  the  Interstate  Commerce  Commission 
determining  the  amount  of  railroad  income  because  of  its  power  to  approve  rates, 
and  the  Railway  Labor  Board  passing  on  or  approving  the  most  important  item  of 
expenditures,  the  -wages  payable  to  railway  employees. 

There  can  be  no  doubt  that  our  future  government  policy  must  change; 
the  regulations  which  are  set  up  must  be  coordinated  with  a bread  general 
policy.  In  the  past  our  legislation  has  been  arranged  to  meet  an  immedia/ta 
current  discrepancy  without  regard  to  an  underlying  cause.  Accordingly,  in 


. 

. 


. 


. 


. 


27 

some  directions,  regulations  have  been  too  severe;  in  other  of  the  problems 
there  has  been  an  absence  of  regulation.  Furthermore,  our  bicameral  govern- 
mental legislation  causes  many  compromise  acts  to  be  passed  which,  although 
desirable  in  many  cases  to  limit  undue  severity,  more  often  leave  problems  un- 
settled; regulative  enough  to  hinder  private  managerial  progress,  yet  with  not 
sufficient  statutory  provision  to  permit  the  governmental  commissions  to  de- 
termine what  procedure  shall  be  established.  We  leave  this  particular  pro- 
posal to  come  back  to  it  again  in  other  group  recommendations. 

RATE  MAKING  POLICY. 

The  railway  executives  recommended  that  rate  changes  should  be  instituted 
and  initiated  by  the  carriers  as  they  had  been  in  the  past,  and  that  the  Inter- 
state Commerce  Commission  should  be  given  exclusive  power  to  provide  rate 
regulation,  which  procedure  is  not  at  all  different  from  the  method  which  has 
been  employed  in  the  past.  Hates  were  to  become  effective  in  thirty  (30)  days 
unless  suspended  by  the  Commission — the  suspension  period  was  to  be  cut  to 
sixty  days  (60).  There  can  be  no  doubt  of  the  desirability  of  cutting  down 
the  period  of  suspension.  The  period  of  120  days  with  six  months  additional 
as  allowed  in  the  amendment  of  1910  was  entirely  too  long;  the  causes  for  de- 
manding a rate  change  might  have  passed  before  a ten  month  period  has  elapsed. 
The  Commission  was  also  to  be  given  the  authority  to  set  a minimum  as  well  as 
a maximum  rate,  a very  excellent  recommendation  in  that  it  enlarged  greatly 
the  power  of  the  Commission  over  rate  making;  under  the  old  law  the  Commission 
was  only  empowered  to  set  a maximum  rate.  This  plan  also  provides  for  another 
desirable  constructive  change;  a provision  for  the  establishment  of  sub- 
committees in  different  regions  to  aid  the  commission  in  deciding  upon  the 

Justification  of  any  new  rates  or  rate  changes  in  their  respective  territory. 

1 Kearings-Senate  Committee  on  Interstate  Commerce-  65th  Congress ,Vol . I , p.311. 


• 

• 

. 


. 

■ . ■ * 1 u \ $ 


■ 


■ 


. 


28 


This  policy  would  have  "relieved  the  Interstate  Commerce  Commission  of  some  of 
its  administrative  and  executive  functions  and  made  of  it  mere  nearly  a quasi- 
judiciary for  the  adjudication  of  controversies  regarding  the  reasonableness  of 
rates  and  for  the  prevention  of  discriminations."'1 2 3'  The  sub -commissions  would 
then  have  the  original  power  of  passing  on  rate  changes.  That  this  plan  for 
sub-commissions  is  desirable,  there  is  no  doubt.  In  the  United  States  there 
are  very  distinct  differences  in  various  parts  of  the  country.  The  seasonal 
demands  of  the  south  and  west  for  equipment  and  railroad  facilities  present  a 
different  problem  from  the  demands  of  the  manufacturing  east;  the  predominance 
of  traffic  in  one  direction  in  the  south  presents  another  difference,  etc. 

-All  of  these  circumstances  emphasize  the  problem  which  must  be  met  by  a central 
commission.  Regional  groups  could  aid  materially  in  determining  whether  or 
not  rate  changes  should  be  made  because  they  would  be  more  directly  in  contact 
with  the  problems  existant  in  their  respective  communities.  The  Interstate 
Commerce  Commission  is  no  doubt  as  fair  and  thorough  as  is  possible  in  its 

every  decision  but  the  very  moment  and  volume  of  the  many  cases  it  has  to  decide 

2 

make  impossible  a thorough  study  of  every  case  presented. 

The  proposal  of  the  executives  further  recommended  that  a fair  rate  should 
make  possible  a revenue  sufficient  to  pay  all  expenses  of  operation,  a fair 
return  on  the  value  of  the  property  so  as  to  establish  a credit  sufficient  to 
attract  capital  for  the  needs  of  maintenance  and  replacement  as  are  required 
in  our  advancing  industrialism  and  our  economic  progression?  There  was  a 
further  recommendation  in  that  the  newly  provised  Federal  Transportation  Board 
should  certify  as  to  what  should  constitute  a revenue  sufficient  to  provide 

1 Sharfman,  The  American  Railroad  Problem,  p.  368. 

2 Senate  Hearings,  p.  312. 

3 Annal s of  the  American  Academy  of  Political  and  Social  Science . Nov. , 1919, 
p.  95. 


. 


29 

funds  for  the  operating  needs  of  the  railroads  so  that  they  might  provide  the 
most  efficient  public  service.  The  two  bodies  working  together  would  probably 
make  for  greater  efficiency  if  co-operation  were  to  be  the  keynote  of  their 
efforts,  rather  than  the  so  often  noted  operation  of  two  governmental  bodies 
in  the  same  field  in  which  one  group  feels  that  it3  duty  is  to  check  the  other 
rather  than  give  assistance.  His  Commerce  Court  was  discontinued  in  1913 
after  a three  year  exi stance  because  it  did  not  realize  its  proper  function. 

FINANCIAL  REGULATION. 

For  some  years  there  had  existed  a demand  for  some  type  of  legislation  to 
give  the  Interstate  Commerce  Commission  power  to  control  railway  security 
issues  and  railway  capital  expenditures.  At  this  time,  even  the  railway  ex- 
ecutives were  beginning  tc  realize  that  this  demand  should  be  met  in  the 
establishment  of  legislation.  It  was  apparent  tc  the  managers  for  possibly 
three  reasons.  (l)  Because  state  legislation  had  already  been  enacted  and 

there  were  so  many  differences  in  the  nature  of  state  commission  regulations 
and  so  many  degrees  of  enforcement  that  any  reasonable  status  of  uniformity 
under  the  national  government  would  be  much  more  acceptable".  (2)  It  7/ as 
necessary  tc  meet  the  demands  of  an  insistent  public  which  wanted  no  reoccuifBnce 
of  financial  manipulations  such  as  had  occurred  even  in  recent  years  in  the  in- 
stances of  the  New  York,  New  Haven  and  Hartford  and  the  St.  Louis  and  San 
Francisco  Railroads.  (3)  Because  the  railroad  executives  themselves  were  con- 
vinced that  assistance  was  necessary  to  establish  railroad  credit. 

Accordingly  we  find  the  plan  calling  for  an  exclusive  national  control  of 

security  issues  and  a control  of  the  expenditure  of  funds  secured  from  bond 
2 

and  stock  issues.'  The  control  was  to  be  in  the  hands  of  the  Federal  Trans- 

1 Lovett,  Comment s on  the  Railroad  Problem,  p.  43. 

2 Annals'  of  the  American  Academy  of  Political  and  Social  Science.  Nov. , 1919, 
p.  93. 


. 


. 

. 


. 

. 


30 


Board 

port  at  ion  which  was  to  bs  organized  as  previously  discussed.  Ho  mention  was 
made  as  to  how  extensive  a control  was  to  be  exercised;  it  is  quite  likely 
that  the  executives  did  not  wish  for  or  contemplate  a very  confining  or  re- 
strictive control  at  first.  If  this  was  their  impression  and  desire  they 
have  plenty  of  justification  for  it.  The  government  must  pursue  carefully 
its  control  over  a new  phase  of  regulation  or  it  may  err  in  passing  acts  that 
will  retard  railroad  construction  which  must  be  consistent  with  industrial 
development  generally.  The  government  regulation  in  controlling  rates  was 
slow  and  evolutionary,  and,  although  the  financial  problem  may  not  bear  as 
many  complexes,  it  must  nevertheless  bring  about  a gradual  settlement  of  the 
difficulties. 

TYPE  OF  OWNERSHIP . 

This  plan  recommends  a continuation  of  private  ownership  and  operation  as 

had  existed  previous  to  the  world  war  with  the  policy  of  a control  under 

broad  general  national  authority  with  a unified  system  of  governmental  regula- 
1 

tion.  Despite  the  fact  that  this  terminology  is  broad  and  general  it  is  not 
ambigious.  It  indicates  that  the  executives  wish  to  have  regulation  sufficient 
to  care  for  the  public  policies,  yet  broad  enough  so  as  not  to  retard  the  pro- 
gress of  their  private  operations.  Their  policy  is  fair  enough  if  the 
operators  are  faithful  in  the  fulfillment  of  their  obligations  and  functions 
as  are  required  to  meet  the  demands  of  the  general  public. 

PROVISIONS  FOR  COMPETITION  AND  CONSOLIDATION. 

In  other  plans  which  are  to  be  analyzed,  we  shall  note  recommendations 

for  a combination  of  roads  into  large  units  or  companies,  provided  competition 

1 Annals  of  the  American  Academy  of  Political  and  Social  Science , Nov.  1919, 
p.  52. 


. 


. 


. 


- 

. 


31 

is  not  interfered  with,  for  the  purpose  of  increasing  efficiency  and  providing 
the  carriers  with  a greater  credit  stability.  We  find  the  executives  plan 
as  well  apparently  favorable  to  a policy  which  should  make  possible  the  con- 
solidation of  lines  into  competing  units  where  such  a method  would  be  bene- 
ficial and  helpful  for  the  provision  of  a better  public  serviced  There  can 
be  no  doubt  that  the  executives  wished  to  have  such  a plan  put  into  operation — 
if  the  roads  could  not  enter  into  rate  associations  or  traffic  agreements 
directly  because  such  procedure  would  be  contrary  to  anti-trust  legislation; 
then  a consolidation  plan  would  permit  them  to  take  advantage  of  some  of  the 
benefits  which  could  have  been  acquired  or  derived  from  freedom  of  entering 
into  direct  combination. 

The  plan  further  recommended  the  using  of  terminal  facilities  and  rolling 

stock  jointly  if  such  arrangement  would  help  to  alleviate  the  railroad  Preb- 

le 

lem.  The  enactment  into  law  of  this  last  suggestion  would  be  very  desirable 
legislation  of  a constructive  type.  It  had  been  previously  suggested  but 
never  carried  into  operation  except  as  required  during  the  world  war  when  be- 
cause of  necessity  it  ameliorated  greatly  the  problem  of  car  shortage  and 
proper  equipment  allocation.  Often  the  so-called  car  shortage  problem  is  a 
misnomer,  the  real  difficulty  is  improper  distribution  of  car  equipment.  It 
is  very  doubtful  if  a consolidation  of  lines  is  desirable  if  means  of  joint 
equipment  use  can  be  affected  in  some  other  manner.  The  increased  size  of 
our  systems  must  at  some  time  reach  a point  where  the  law  of  decreasing  re- 
turns roust  operate  because  of  managerial  inability  under  a single  unit  of 
responsible  authority.  The  fact  that  railroads  are  subject  to  the  law  of  in- 
creasing returns  doe3  not  conclusively  prove  that  they  may  not  also  be  subject 

1 Senate  Hearings,  p.  312. 

2 Senate  Hearings,  p.  313. 


- 


'f  1 I ’.'i'  II 


. 


. 


32 


to  the  law  of  decreasing  returns  when  a certain  size  has  been  reached  or  when 
the  problem  of  managerial  force  has  become  to  a certain  degree  complex. 

Plans  such  as  those  suggested  for  the  joint  use  of  facilities  will  help 
to  correct  the  more  outstanding  causes  for  demanding  the  increased  combination 
of  railroads.  Furthermore,  it  is  a hazardous  procedure  and  recommendation 
which  proposes  combination  to  stabilize  credit  stability.  The  combining  of 
a strong  road  with  a weak  road  for  the  purpose  of  adding  financial  strength 
to  the  latter  by  the  bleeding  of  the  former  can,  in  most  cases,  be  successful 
only  for  a short  time.  If  the  weaker  line  is  inefficient  because  of  poor 
management  then  an  injection  of  an  efficient  managerial  method  will  be  helpful 
to  be  sure  axil  is  to  be  recommended.  If,  however,  the  weaker  road  has  been 
unsuccessful  because  of  its  poor  location,  then  no  assistance  from  a stronger 
can  be  helpful  to  the  weaker  road  without  being  to  some  extent  detrimental  to 
the  progress  of  the  stronger  road. 

FEDERAL  INCORPORATION. 

The  next  feature  of  the  plan  to  be  discussed  has  to  do  with  Federal  in- 
corporation. From  time  to  time  there  has  been  an  increasing  demand  for  some 
type  of  Federal  control  and  there  has  also  been  an  increasing  demand  for 
national  ownership  of  the  railroad  companies}  The  arguments  pro  and  con  a3 
they  are  generally  stated  are  familiar  to  the  majority  of  readers.  However, 
the  ordinary  arguments  for  government  ownership  and  operation  have  not  been 
noted  as  the  principal  causes  for  such  a demand  in  the  United  States.  The 
proponents  of  government  control  have  not  used  so  much  the  positive  arguments, 
indicating  that  since  private  operation  is  each  year  becoming  less  desirable 

1 Annal s of  the  American  Academy  of  Political  and  Social  Science.  Nov.  1919, 
p.  92. 


. 

ii  t^iv 


33 


and  less  responsible  because  of  general  inefficiency  and  financial  conditions 
which  have  been  difficult  for  the  private  operators  to  settle,  make  necessary 
the  governmental  attempt*  Government  ownership  may  not  come  about  then  as 
a desirable  expedient  but  rather  as  a necessity. 

The  experience  of  the  Government  luring  the  war,  a successful  experience 
for  the  purpose  for  which  that  control  was  instituted,  cannot  be  enlisted  as 
an  indication  in  either  direction.  The  mean  of  expediency  caused  government 
operation  at  a time  when  a national  mobilization  of  economic  forces  was  as 
necessary  as  the  mobilization  of  man  power.  When  Jevons  remarked  that  an 
industry  can  be  managed  by  government  after  it  has  gone  through  the  promotional 
stage  and  its  functions  are  of  the  routine  type,  he  set  up  a type  of  argument 
which  can  not  yet  be  used  by  the  proponents  of  government  ownership  for  the 
institution  of  that  type  of  operation  in  the  United  States,  for  our  railroads 
are  net  yet  in  their  final  stage  of  development  where  routine  operation  shall 
continuously  proceed.  Our  industrial  progression  has  only  begun  and  our 
railroad  system  must  be  built  up  concomitantly  with  our  industrial  system. 

On  the  other  hand,  the  depleted  credit  condition  that  we  have  under  cur  present 
private  system  of  operation  cannot  build  up  a group  of  transportation  carriers 
that  will  keep  pace  with  the  growing  industrial  needs.  The  problem  is  an 
immediate  one  and  must  be  solved  within  a short  time  or  our  economic  system 
must  bear  the  consequences.  There  are  many  groups  who  recommend  government 
ownership  to  stabilize  railroad  credit  by  the  substitution  of  government 
securities  which  bear  a regular  return  in  the  form  of  interest,  who  are  not 
favorably  inclined  toward  government  operation.  Even  the  advocates  of  the 
Plumb  plan,  the  proposal  of  the  railroad  workers,  as  shall  be  noted  later, 


. 


34 


v/i ah  government  ownership  but  recommend  a type  of  operation  which  is  distinctly 
of  the  private  type.  The  executives  recommended  a clause  providing  for  per- 
missive federal  incorporation  of  railroads  if  reasonable  justification  could 
be  established  because  of  the  continued  inefficiency  under  private  operation. 

LABOR  CONDITIONS. 

Hie  labor  problem  at  this  time  was  important  and  received  thorough  con- 
sideration from  the  railroad  executives.  They  felt  that  "questions  of  wages 
and  working  conditions  should  be  settled  if  possible,  by  officers  of  the 
railroad  companies  and  representatives  of  the  employees."  They  furthermore 
recommended  that  a "board  should  be  constituted  on  which  the  employees,  the 
employers  and  the  general  public  should  have  equal  representation"  to  settle 
problems  in  regard  to  "wages  or  in  regard  to  the  conditions  of  the  service." 
This  conciliatory  board  was  to  review  every  case  according  to  its  merits  and 
report  its  findings  to  the  Transportation  board  in  case  a settlement  could  not 
otherwise  be  reached.  Pending  their  report  on  settlement  and  for  a reasonable 
time  thereafter  there  was  to  be  no  lockout  by  the  carriers  or  strike  by  the 
railroad  employees’!'  This  method  of  conciliation  is  similar  to  those  usually 
advocated  to  provide  settlement  by  carriers  and  employees.  It  seems  to  have 
met  with  varying  degrees  of  success  in  different  cases. 

The  railwa y executives  also  recommended  that  there  be  appointed  a 

secretary  of  Transportation  to  have  equal  rank  in  the  President's  cabinet  with 

other  similar  appointees.  The  duties  of  the  office  were  not  definitely  stated; 

except  that  his  activities  were  tc  be  similar  to  these  exercised  by  other  cabi- 

o 

net  officers  in  their  respective  fields  of  activity1 2! 


1 Senate  Hearings,  p.  311. 

2 Senate  Hearings,  p.  312. 


. 

* 


*y*i 


. 


. 


. 


■ 

. 


35 


This  concludes  the  discussion  of  the  plan  presented  by  the  Association  of 
Railroad  Executives.  It  doe3  not  present  any  extremely  new  ideas  yet  con- 
tains some  constructive  clauses  which  might  be  helpful  especially  in  regard  to 
the  establishment  of  a Federal  Transportation  Board,  and  relative  to  cutting 
down  the  period  for  which  the  Interstate  Commerce  Commission  may  suspend  rates. 
On  the  whole  it  indicates  a desire  for  constructive  legislation,  in  that 
respect  being  similar  to  other  proposals  which  shall  be  studied  in  the  follow- 
ing chapters. 


I 


36 


V 

THE  PROPOSAL  OF  THE  INTERSTATE  COMMERCE  COMMISSION. 

The  plan  presented  to  the  Senate  Committee  by  the  Interstate  Commerce 
Commission  should  receive  thorough  attention  because  there  is  possibly  no 
group  who  are  more  familiar  with  the  railroad  problem  than  this  government 
body.  Even  the  railroad  operators  are  familiar  only  with  the  peculiarities 
of  their  own  system,  but  the  Interstate  Commerce  Commission  has  seen  the 
operation  of  all  of  the  railroads  in  a very  broad  and  extensive  way.  The 
proposals  presented  by  the  commission  are  very  moderate;  not  nearly  as  con- 
structive or  as  reactionary  a3  the  plans  presented  by  some  of  the  other  groups 
that  appeared  before  the  committee.  The  changes  they  recommend  are  mere 
nearly  amendatory  to  the  old  legislation  than  formative  of  a new  program. 

In  many  instances,  a3  shall  be  noted,  the  recommended  changes  are  rather  brief 
and  general  and  a surmization  can  give  only  a broad  opinion  of  the  results 
that  might  evolve  from  their  plans. 

Nevertheless,  we  must  give  thorough  consideration  to  the  ideas  which  are 
presented  by  this  group.  The  thirty-four  years  that  the  Interstate  Commerce 
Commission  has  been  established  have  given  that  body  the  benefit  of  an  in- 
valuable experience  that  should  recommend  their  proposals  as  a guide  for  any 
future  regulative  policy  or  governmental  policy  that  the  United  States  may 
establish.  Their  plan  was  presented  by  Mr.  Edgar  Clark,  who  has  been  a mem- 
ber of  the  Commission  for  some  fourteen  years  and  has  shown  a remarkable 
aptitude  for  the  development  of  railroad  problem  settlement  during  his  term  of 
office. 

There  have  been  many  who  have  been  wont  to  criticize  the  Interstate 


. 


'•  * 


. 


. 

. 


a 

. 


37 

Commerce  Commission  for  not  having  set  up  a more  general  policy,  yet  we  are 
informed  by  Mr.  Robert  Lovett,  who  was  Director  of  Priorities  during  the 
Federal  Control  and  president  of  the  Union  Pacific,  ’’that  the  time  had  arrived 
for  Congress  to  declare  by  law  a national  railroad  policy,  and  not  leave  it  to 
the  Interstate  Commerce  Commissioners  or  other  subordinate  officers  or  agencies 
to  3ay  whether  the  policies  of  the  national  Government  are  to  impoverish  the 
railroads  to  please  certain  shippers,  or  to  improve  and  extend  railroad 
facilities  for  the  country  by  making  compensatory  rates,  or  to  pursue  one 
policy  at  one  season  and  the  other  policy  at  another. 

"It  is  not  enough  to  create  them  (national  railroad  agencies)  with 
authority  to  act,  but  they  must  be  sufficient  in  number  and  character  to  act, 
for  it  is  worse  than  idle  to  confer  jurisdiction  and  authority,  as  upon  the 
Interstate  Commerce  Commission,  to  perform  a task  which  in  magnitude  is  utterly 
beyoxid  its  power  to  perform."^- 

METHOD  OF.  FEDERAL  CONTROL 

The  Interstate  Commerce  Commission  wanted,  of  course,  the  maintenance  of 
the  commission  with  all  of  its  present  powers  intact  but  with  a desired 
additional  authority  in  several  instances.  Commissioner  Clark  recommended 
the  establishment  of  a larger  body;  the  need  for  a larger  commission  being 
best  described  in  his  own  words:  "The  passage  of  a new  law  increasing  the 

powers  and  functions  of  the  Interstate  Commerce  Commission  will  necessarily 
increase  its  work  and  make  imperative  the  enlargement  of  its  machinery. 

Under  the  law  as  it  is  today,  the  commission  consists  of  nine  members  and  is 
permitted  to  divide  itself  into  subdivisions  of  not  less  than  three  members 

1 Edgar  E.  Clark,  Clark  on  Interstate  Commerce , p.  lxxi. 


- 

. 


' 


. 


* 


■ 


i 


38 

each.  The  new  law  ought  to  provide  for  increasing  its  membership  from  nine  to 
twelve,  so  as  to  enable  it  to  work  in  four  subdivisions.  One  great  fault  in 
the  present  law  is  the  absence  of  a permanent  head  of  the  commission ”1 

"In  view  of  the  great  activities  of  the  commission  it  is  now  impossible, 
except  in  rare  cases  for  a commissioner  or  commissioners  to  hear  testimony  in 
person.  Every  shipper  and  carrier  would  prefer  that  a member  of  the  commissior 
should  sit  in  a case This  system  is  not  calculated  to  bring  the  best  re- 

sults. " 

Commissioner  Clark  recommended  that  there  be  appointed  a Chief  commissioner 
to  be  paid  $13,500  per  year,  eleven  associate  commissioners  to  be  paid  312,000 
per  year  and  twenty-four  deputy  commissioners  to  be  paid  $10,000  per  year. 

(a)  The  commission  asked  for  control  of  consolidations  and  pooling  arrange- 
ments. It  is  interesting  to  note  that  the  commission  realized  the  need  of 
equipment  pooling.  The  success  of  pooling  arrangements  during  the  war  made  it 
apparent  to  all  of  the  groups  presenting  plans  that  such  an  arrangement  was 
possible  and  workable.  But  the  point  still  remains  to  determine  whether  or 
not  the  success  of  a program  brought  about  by  a war  necessity  during  a period 
when  national  unity  was  not  only  expedient  but  essential  would  be  as  successful 
during  a period  of  normality.  There  are  some  complexities  to  be  sure  which, 
during  a period  in  which  patriotic  fervor  predominates  cannot  so  easily  be  set 
aside  during  a period  of  peace.  It  is  worth  a trial  nevertheless.  All 
methods  for  settlement  of  these  very  retarding  features  of  our  present  dis- 
crepancy in  railroad  operation  present  difficulties,  and  if,  by  overcoming 
these  difficulties,  we  can  eventually  effect  a precise  path,  not  so  replete 
with  problems,  we  had  best  go  ahead  with  it. 

1 Lovett,  Comment s on  the  Railroad  Problem,  pp.  31-32. 


3S 

(b)  The  commission  wanted  power  over  the  construction  of  branch  lines,  ex- 
tensions, and  new  lines.  Whether  or  not  a government  body  is  more  wise  in 
determining  the  need  for  new  constructions  is  a problem.  An  efficient  manager- 
ial force  in  charge  of  railroads,  immediately  in  touch  with  tlie  operation  prob- 
lems of  any  particular  road  and  providing  facility  in  a given  tei’ritorji  should 
be  more  able  to  observe  the  need  for  railroad  betterments  and  additions. 

Whether  or  not  we  have  such  a capable  group  of  managers  in  charge  of  our  systems 
is  a contentious  question;  it  would  seem  that  we  should  have,  and,  in  the  great- 
er number  of  cases,  I am  sure  that  we  would  find  their  judgment  secure  enough. 

In  that  event,  any  control  by  government  should  be  granted  with  extreme  care 
lest  necessary  construction  be  retarded  rather  than  unnecessary  construction 
promoted. 

(c)  "Establishment  of  a relationship  between  Federal  and  state  authorities 
which  will  eliminate  the  twilight  zone  of  jurisdiction  and  under  which  a har- 
monious rate  structure  and  an  adequate  service  can  be  secured,  state  and  inter- 
state." x Although  there  has  been  a general  tendency  by  Supreme  Court  decision 
to  extend  the  powers  of  the  Interstate  Commerce  Commission  in  such  cases  as 
Peik  vs.  northwestern  and  the  Wabash  Case,  there  still  exists  many  conflicts 
which  require  elimination.  Although  the  great  difficulties  of  the  rate  problem 
have  been  settled,  there  will  reoccur  again  a new  set  of  difficulties  in  the 
form  of  conflicting  authority  as  the  Interstate  Commerce  Commission  extends  its 
authority  in  the  fields  of  railroad  finance,  service  and  operation.  Especially 
if  a number  of  consolidations  are  effected  in  subsequent  years,  the  number  and 
nature  of  financial  conflicts  will  be  very  apparent.  In  past  consolidations, 
railroads  have  selected  those  states  having  the  most  lenient  finance  laws  to 
carry  on  their  reorganization. 

1 Senate  Hearings . p.  244. 


40 


(d)  The  Interstate  Commerce  Commission  wanted  a more  complete  regulatory 
power  over  waterways.  The  Panama  Canal  Act  of  1912  gave  the  commission  power 
to  regulate  competition  hut  the  control  over  rates  and  regulations  had  not  been 
considered.  It  is  well  to  note,  furthermore,  that  waterways  have  not  been 
subjected  to  such  close  supervision  by  the  state  authorities  as  have  the  rail- 
road companies — there  is  a need  for  a reasonable  amount  of  government  regula- 

t ion. 

(e)  The  Interstate  Commerce  Commission  asked  for  control  over  security 
issues  and  the  purposes  for  which  the  expenditures  were  to  be  made.  The  de- 
sirability of  such  a proposal  was  discussed  previously  in  the  discussion  of  the 
Senate  Committee  plan. 

RATE  MAKING  POLICY. 

The  commission  proposal  recommended  a continuation  of  the  rate  making 
policy  mentioning,  as  did  other  of  the  proposals,  that  the  suspension  period 
was  too  long  and  that  it  should  be  cut  down  to  a period  reasonably  necessary 
to  establish  a justification  of  proposed  changes.  Commissioner  Clark  recommen- 
ded that  the  Interstate  Commerce  Commission  be  given  power  to  initiate  rates; 
also  that  the  commission  be  granted  the  privilege  to  set  a minimum  as  well  as 
a maximum  rate.  "This  power  would  restrain  an  individual  carrier  from  further- 
ing its  own  ends  at  the  expense  of  others  by  unwise  and  unwarranted  upsetting 
of  reasonable  rate  adjustments.  If  the  rates  and  charges  are  by  regulation 
confined  within  the  reasonably  narrow-  limits  between  the  maximum  and  minimum 
reasonable  charges,  no  public  interest  can  be  injured  by  the  carriers  all 
maintaining  charges  within  those  limits.  If  without  undxily  lowering  or  re- 

stricting the  standard  of  service  economy  in  maintenance  and  operation  can  be 
secured  by  cooperative  agreement  or  consolidation,  under  governmental  super- 


. 


. 


■ 


41 

vision  or  approval,  of  two  or  more  lines,  the  public  is  not  injured,  while  the 
sum  available  for  improvements  and  betterments  of  the  carrier  properties  is 
augmented.”  Strong  emphasis  was  put  on  the  cost  of  service  principle  of 

rate  making.  The  Interstate  Commerce  Commission  has  been  from  time  to  time, 

recommending  changes  which  would  cause  the  cost  of  service  theory  to  stand  out 
as  the  most  important  basi3. , In  Trunk  Line  territory  there  is  a noticeably 
close  adherence  to  this  principle;  but  we  must  note  that  it  is  in  this  terri- 
tory that  the  circumstances  are  most  befitting  for  it  to  apply.  The  problems 
such  as  must  be  met  in  the  South  are  lacking  there;  such  as  the  severity  of 
water  competition,  the  predominance  of  traffic  in  one  direction,  the  seasonal 
demand  for  equipment  and  the  predominance  of  a number  of  small  cities  which 
have  a very  erratic  and  inconsistent  demand  for  railroad  facilities  and  service. 
It  will  accordingly,  take  a reasonable  amount  of  time  before  there  can  be  a 
substitution  of  the  cost  of  service  principle  for  the  value  of  the  service 
principle  as  the  proper  method  of  rate  making  in  southern  territory,  and  even 
then,  other  factors  must  receive  a considerable  amount  of  attention  because  of 
the  extreme  and  vital  type  of  competition  that  must  be  met  from  the  waterway 
companies. 

FINANCIAL  REGULATION. 

In  1913  the  Interstate  Commerce  Commission  had  been  given  the  power  to 
tabulate  a complete  record  of  the  financial  statements  of  each  of  the  carriers 
in  interline  traffic  and  were  authorized  to  keep  them  up  to  date  by  recording 
all  changes  that  were  made  and  betterments  which  increased  the  capitalization  of 
the  railroad  companies.  This  procedure  indicated  that  it  was  eventually  con- 

1 Clark  on  Interstate  Commerce t p.  12. 


. 


V 

; 


. 

■ 


42 

template!  that  the  commission  would  take  over  the  complete  control  of  the  prob- 
lem of  security  issues  and  the  purposes  for  which  the  expenditures  were  made. 
Commissioner  Clark  very  definitely  made  these  recommendations  as  we  note  from 
his  own  rejjort  to  the  Senate  Commission.  ’’The  advisability,  desirability,  and 
propriety  of  public  or  governmental  regulation  of  the  issuance  of  securities  by 
public  service  corporations  is  conceded  generally  by  thinking  and  fair-minded 
men.  A proper  Federal  regulation  of  the  issuance  of  securities  by  the 
corporations  engaged  in  interstate  transportation  and  the  supervision  of  the 
application  of  the  proceeds  therefrom  would  go  far  toward  preventing  the  abuses 
referred  to  in  the  preceding  paragraph.  The  commission  is  on  record  for  several 
years  past  as  favoring  such  supervision  and  regulation  of  the  issuance  of 
securities. ” 

TYPE  OF  OWNERSHIP. 

Hie  recommendations  of  the  Commission  were  not  very  extensive  in  regard  to 
that  of  ownership,  although  from  the  nature  of  the  proposals  they  presented  it 
is  apparent  that  a continuation  of  private  ownership  was  contemplated  and  de- 
sired. This  view  becomes  more  apparent  when  the  commission  declared  that  it 
was  absolutely  opposed  to  federal  incorporation  because  it  presented  ''&j  com- 
plicated, protracted  and  probably  unconstitutional  method  of  operation. 
Commissioner  Robert  W.  Wooley  was  the  only  member  to  oppose  immediate  reversion 
to  private  operation,  he  being  favorable  to  the  five-year  extension  of  govern- 
ment operation  a3  proposed  by  Directors-general  Hines  and  McAdoo  in  order  to 
give  the  method  a chance  to  function  during  a period  of  normality  to  note  whether 
or  not  the  operation  might  be  more  successful. 

1 Waterman,  Rations  Business . ITov.  , 1919. 


43 

PROVISIONS  FOR  CONSOLIDATION  AND  COMPETITION. 

Hie  commission  was  somewhat  in  favor  of  consolidation  providing  that  the 
contemplated  consolidations  were  to  he  approved  by  the  Interstate  Commerce 
Commission;  it  is  quite  likely  that  they  had  in  mind  the  addition  of  small 
lines  rather  than  the  consolidation  of  a number  of  larger  systems.  Senator 
Gore,  of  the  Senate  Committee  on  Interstate  Commerce,  supported  by  Commissioner 
Clark  presents  a strong  disapproval  of  any  regional  subdivision  or  regional 
merger,  for  such  a plan  "would  be  artificial,  reverse  the  lav/  of  progress  and 
tend  toward  disintegration  rather  than  integration.”^  Commissioner  Clark 
strongly  recommends  the  pooling  of  box  car  equipment  and  that  power  be  given 
the  Interstate  Commerce  Commission  to  force  carriers  to  provide  sufficient 
equipment  and  motive  powers  at  all  times'^ 

LABOR  CONDITIONS. 

The  recommendations  of  the  commission  contained  no  provisions  for  the 
settlement  of  labor  difficulties  because  that  body  felt  that  it  had  become 
the  established  policy  of  Congress  to  entrust  these  responsibilities  to  other 
agencies,  as  is  noticeable  under  the  Erdman  A.ct  of  18S8  and  the  Newlands  Act. 

As  has  been  previously  noted,  the  Interstate  Commerce  Commission  has  to  do 
not  sc  much  with  the  broader  social  or  economic  problems  as  with  the  rate, 
financial  and  operation  problems. 


1 Clark  on  Interstate  Commerce . pp  5?-8. 

2 Clark  on  Interstate  Commerce . p.  15. 


■ 


J 


. 


■ ■ 


44 


VI 

THE  PLAN  OF  THE  NATIONAL  ASSOCIATION  OF  OWNERS  OF  RAILROAD  SECURITIES. 

Tlie  National  Association  of  Owners  of  Railroad  Securities  has  in  recent 
years  been  a vital  force  in  the  field  because  it  has  been  one  of  the  groups 
that  is  most  vitally  concerned  in  the  success  of  the  railroad  companies; 
t&e  failure  of  the  roads  to  operate  successfully  amounts  to  a loss  resulting 
in  lower  dividends  coming  to  the  security  holders.  Their  proposals  are  some- 
what similar  to  those  presented  by  the  railroad  executives  yet  there  are 
enough  differences  to  merit  attention  being  given  to  their  plan.  Many  of 
their  ideas  are  presented  in  a very  general  way  because  their  program  represent 
such  a strict  departure  from  the  present  development,  that  any  definite  state- 
ment of  the  exact  form  which  they  should  take  would  be  rather  difficult. 

Their  spokesman  before  the  Senate  Committee  on  Interstate  Commerce  was  Mr.  S. 
Davies  Warfield,  the  President  of  the  Association.  The  most  important  con- 
structive change  proposed  has  to  do  with  the  method  of  federal  control. 

METHOD  OF  FEDERAL  CONTROL. 

"Federal  regulation  extended  through  the  Interstate  Commerce  Commission 
as  at  present  established,  coordinating  therewith  subsidiary  commissions,  as 
regional  commissions,  the  members  thereof  selected  equally  from  the  two  lead- 
ing political  parties  appointed  from  and  sitting  in  the  six  traffic  terri- 
tories as  at  present  defined,  giving  such  bodies  the  determination  of  rates 
and  regulations  essential  to  the  operation  of  the  plan.  The  right  of  appeal 
i3  given  to  the  Interstate  Commerce  Commission,  which  may  be  designated  a 
commission  of  appeal. Their  plan  in  regard  to  the  institution  of  sub- 


1 Senate  Hearings,  p.  794. 


45 


sidiary  commissions  is  very  similar  to  that  suggested  by  the  railway  execu- 
tives and  needs  no  further  comment.  It  was  their  proposal  to  have  the  Inter- 
state Commerce  Commission  control  and  regulate  rates,  and  also  to  settle  wage 
questions  and  take  up  such  other  regulatory  functions  as  might  he  necessary 
from  time  to  time. 

Thera  is  also  a recommendation  for  a second  group,  the  duties  and  com- 
position of  which  can  hast  he  observed  in  the  terms  of  the  proposal: — 

"A  corporation,  created  by  act  of  Congress,  operated  without  profit  to  the 
railroads,  and  under  Federal  control,  directed  by  trustees  composed  of  the  nine 
Interstate  Commerce  Commissioners  and  eight  railroad  men,  to  finance  in  the 
present  emergency  such  equipment  as  may  be  purchased  by  it  from  the  Railroad 
administration  and  allocated  to  the  railroads,  and  to  furnish  an  immediate 
means  for  assisting  in  financing  the  return  of  the  roads;  to  provide  a manage- 
ment or  agency  to  continue  or  put  into  effect  the  joint  use  of  terminals, 
unification  of  facilities,  rerouting  of  freight  by  pooling  or  otherwise,  and 
to  continue  or  adopt  such  methods  of  operation  as  may  have  been  found  to  be 
successful  and  expedient  during  Federal  control;  to  furnish  a standing, 
trained,  and  efficient  means  for  immediate  mobilization  of  the  railroads  for 
war  purposes  without  additional  legislation. 1,1 

This  proposal  is  at  first  seemingly  radical  and  very  different  from  any 
other  suggested,  yet  in  its  final  analysis  it  is  not  so  different  from  the 
idea  presented  by  the  railway  executives  for  a Federal  Transportation  board 
to  take  charge  of  the  broad,  general  problems  that  are  presented  in  railway 
transportation.  It  differs  in  that  it  is  composed  of  a much  larger  group  of 
men  which  might  make  its  regulations  of  the  compromise  type,  yet  it  is  quite 


1 Senate  Hearings,  p.  794. 


. 


. 


. 


■ 

. 

S' 

' 


'^Ki 


46 

likely  that  the  suggestions  made  by  the  Interstate  Commerce  Commission  would 
he  only  of  the  advisory  type,  and  that  the  duties  of  the  new  group  would 
have  been  "borne  in  the  major  part  "by  the  other  members.  The  desirability  of 
such  a program  is  essential  if  we  can  determine  definitely  that  the  present 
problem  is  due  to  the  inefficiencies  of  private  management  and  that  a 
government  program  of  the  type  mentioned  will  be  at  all  helpful.  If  govern- 
ment ownership  and  operation  is  to  be  our  eventual  program,  then  the  forma- 
tion of  a National  Railway  Association,  to  have  the  duties  above  quoted, 

Vould  lay  a very  essential  groundwork  for  government  unification,  despite  the 
fact  that  the  National  Association  of  Owners  of  Railroad  Securities  has  ex- 
pressed itself  as  being  very  definitely  opposed  to  any  scheme  for  federal  in- 
corporation. 

Two  objections  or  difficulties  may  also  be  set  up:--  (1)  The  duties  of 
the  members  of  the  Interstate  Commerce  Commission  are  already  so  numerous 
and  exacting  that  it  would  be  impossible  for  them  to  participate  in  this 
w ider  program  without  having  an  additional  membership.  On  the  other  hand, 
it  is  desirable  to  have  the  federal  regulation  of  roads  contained  within  a 
single  group,  for  previous  experience  has  indicated  that  cooperation  is  not 
readily  forthcoming  when  the  control  is  divided  among  a number  of  governmental 
bodies.  (3)  It  is  doubtful  whether  the  methods  of  overcoming  and  facilitating 
operating  difficulties  during  the  period  of  the  war  would  be  successful  during 
a period  of  normality.  The  proponents  of  this  plan,  however,  realized  that 
there  were  a number  of  advantages  derived  from  the  war  experience  that 
should  help  to  ameliorate  the  problem  during  a period  of  normality  as  well. 


' 


4? 

HATE  MAKING  POLICY. 

Under  this  plan,  rates  are  to  "be  initiated  by  the  carriers  and  the  pro- 
posed rate  changes  are  to  be  submitted  to  a committee  composed  of  railroad  men 
and  shippers  appointed  by  the  Interstate  Commerce  Commission  before  they  are 
submitted  to  the  regional  commissions  for  final  action. 

It  was  further  recommended  that  there  be  established  "a  minimum  rate  of 
return  on  the  property  investment  in  the  railroads,  fixed  by  act  of  Congress, 
through  rates  adjusted  as  occasion  may  demand,  in  order  that  the  securities  of 
the  railroads  may  be  stabilized  and  their  credit  established  on  a basis 
necessary  to  secure  the  money  to  provide  to  the  shippers  and  traveling  adequate 
facilities  and  service.”^  It  was  further  provided  that  any  excess  above  a 
reasonable  rate  of  return  should  be  distributed  ’hinder  the  control  and  juris- 
diction of  the  Interstate  Commerce  Commission  of  a percentage  of  the  fund  above 
provided,  that  railroad  employees  shall  receive  the  benefit  of  profit  sharing, 
by  insurance  or  by  such  legal  methods  as  may  be  determined  upon;  likewise  a 
distribution  of  a percentage  thereof  among  the  railroads  earning  it,  and  under 
the  plan,  and  in  furtherance  of  incentive  and  initiative  by  establishing 
operating  efficiency  standards;  for  certain  improvements  to  railroad  property, 

under  restrictions,  not  to  be  capitalized  in  rate-making;  and  for  other  pur- 

2 

poses  defined  in  the  plan.” 

That  the  proposal  mentioned  takes  care  of  the  labor  interests  especially  - 
there  can  be  no  doubt,  but  whether  or  not  labor  will  be  satisfied  with  such  a 
settlement  is  purely  a matter  of  conjecture.  Profit-sharing  plans  in  the  past 
have  not  been  successful  in  satisfying  the  demands  of  employees  and  it  is  very 

1 Senate  Hearings,  p.  793. 

2 Senate  Hearings,  p.  723. 


4 


■ 


. 


. . • *IM  1 


43 


' doubtful  if  this  program  will  be  more  helpful  than  the  many  carefully  proposed 
ideas  that  have  been  advocated  in  the  past.  The  present  labor  problem  is  not 
so  much  a desire  for  an  increased  wage  as  it  is  one  for  economic  security  and 
for  reasonable  working  conditions.  The  employees  of  the  railroad  companies 
are  well  organized  into  unions,  and  it  has  been  the  policy  of  unions  in  past 
history  to  oppose  the  majority  of  schemes  that  have  been  presented,  because 
they  contend  that  they  cause  the  employees  to  enter  into  sympathy  with  the  em- 
ployers. Furthermore,  any  method  of  distribution  of  earnings  that  sets  a 
limit  on  the  earnings  of  a corporation  has  a tendency  to  cut  down  the  degree 
1 of  initiative  displayed  in  management  which  is  so  essential  to  progressive  in- 
dustry, On  the  other  hand  an  income  much  above  a reasonable  return  is  not  to 
be  desired. 

Mr.  Eea,  President  of  the  Pennsylvania  Railroad  informs  us  that  "a  govern- 
I ment  guarantee  would  plunge  the  country  into  a wholesale  financial  reorganiza- 
tion of  the  railroads  extending  over  a period  of  years,  and  would  ultimately 
mean  Government  ownership, " for  government  would  not  be  willing  to  guarantee  a 
return  without  having  complete  financial  control  and  there  would  be  the 
possibility  of  capital  improvements  being  determined,  not  by  economic  necessity 
but  rather  by  the  political  judgment  of  each  administration^ 

In  the  Railway  Age  of  May  9,  191S,  we  find  Mr.  Samuel  Dunn  editorially  in- 
forming U3  that  the  principal  objection  to  assurance  to  income  is  that  it  has 
the  tendency  to  cut  down  initiative.  This  is  the  old  argument  against  govern- 
ment interference;  perhaps  it  is  justifiable  enough  but  there  is  no  doubt  but 
that  it  can  be  overestimated;  at  least  we  would  not  want  to  use  it  as  a 
justification  for  the  excess  return  which  accrues  to  those  carriers  which  have 
an  advantageous  location. 


1 Address,  Chamber  of  Commerce,  St.  Louis,  May,  1919. 


49 

Mr.  Daniel  Willard,  president  of  the  Baltimore  and  Ohio,  is  opposed  to  a 

division  of  excess  profits  with  labor  "because  such  a plan  would  be  extremely 

difficult  of  fair  application,  and  does  not  rest  upon  the  right  principle.  I 

believe  thoroughly  in  good  wages  and  if  a man  does  work  of  unusual  value  he 

should  receive  unusual  reward,  but  the  two  should  go  together;  and  that  would 

1 

not  necessarily  follow  under  Mr.  Warfield's  plan." 

FliTANC IAL  REGULATIONS . 

The  recommendations  contained  in  the  plan  provided  that  future  issues  of 
railroad  securities  were  to  be  subject  to  the  approval  of  the  regional  com- 
missions and  the  Interstate  Commerce  commission.  This  plan  is  individualistic 
in  that  it  indicates  that  the  regional  commissions  are  not  only  to  have  to  do 
with  rate  making  operations  but  with  financial  problems  as  well.  All  other 
plans  presented  provided  that  the  major  part  of  the  work  of  the  sub-commissions 
was  to  have  to  do  only  with  rate  problems  and  to  some  extent  the  supervision  of 
the  uniformity  of  accounting  systems . It  would  be  well  not  to  burden  too  much 
the  work  of  the  regional  commissions  or  the  objections  could  well  be  set  that 
are  used  against  the  Interstate  Commerce  Commission,  in  that  their  duties  are  so 
numerous  that  the  best  and  most  complete  results  cannot  be  secured. 

TYPES  OE  OWNERSHIP. 

The  railroads  were  to  be  immediately  returned  to  the  private  owners. 
Consolidation  was  to  be  permitted  in  those  cases  in  which  it  was  decided  that  it 
would  be  most  befitting  for  the  benefit  of  the  interest  of  the  general  public. 
The  proposal  v/as  entirely  in  accord  with  that  presented  by  the  interstate 
Commerce  Commission  in  regard  to  federal  incorporation;  that  it  was  absolutely 
unnecessary  and  undesirable. 

1 W,  Cook,  A Solution  of  the  Railroad  Problem  in  Sight . pp.  25-7. 


i 


. 


' 


. 


. 


. 


50 

LABOR  CONDITIONS. 

A Brief  clause  in  the  plan  was  presented  to  care  for  the  labor  problem, 
other  than  that  previously  mentioned  in  regard  to  the  division  of  excess  profits 
Hie  regional  commissions  were  to  act  as  boards  of  conciliation  for  the  settle- 
ment of  wage  differences  between  the  carriers  and  the  laborers.  If  the 
commissions  could  not  settle  the  differences,  they  were  to  appoint  two  arbitra- 
tors, the  employees  were  to  name  two,  and  the  four  were  to  select  a fifth,  if 
required.  There  was  the  possibility  of  an  appeal  to  the  Interstate  Commerce 
Commission,  but  the  findings  of  that  group  were  not  to  be  compulsory  unless 
mutually  agreed  beforehand.  Since  a fixed  return  had  been  provided  for  as 
previously  mentioned  in  the  plan,  wage  expenditures  were  to  be  supervised  by 
the  commissions^ 

There  are  some  possibly  and  seemingly  apparent  objections  to  this  plan. 
Although  not  the  most  important,  nevertheless,  one  of  the  outstanding  reasons 
for  the  establishment  of  regional  commissions  is  to  relieve  the  Interstate 
Commerce  Commissions  of  its  many  duties,  yet  by  adding  the  problem  of  settle- 
ment of  labor  difficulties  to  the  duties  of  the  newly  formed  groups,  they  in 
turn  will  be  over-burdened.  On  the  other  hand,  it  is  desirable  to  have  the 
control  of  rate  settlement  and  of  labor  problems  within  the  authority  of  the 
same  government  group  because  a separation  of  these  functions  may  lead  to  in- 
coherent conclusions  in  the  relation  of  income  to  operating  expenditures. 

There  is  also  always  the  outstanding  objection  of  having  two  sets  of 
commissions  or  complimentary  commissions  in  that  if  there  is  the  possibility  of 
an  appeal,  there  is  usually  one  made  by  the  party  that  feels  that  it  wa3  not 
fairly  treated  in  the  decision;  hence,  it  is  likely  that  a larg9  number  of 

1 Senate  Hearings,  p.  794. 


¥ 


\ 


51 


cas33  which  the  regional  commissions  attempted  to  settle  would  eventually  he 
appealed  to  the  Interstate  Commission  for  final  determination.  There  are  ad- 
vantages as  well  in  permitting  an  appeal,  in  that  the  original  tribunal  will 
attempt  to  he  more  careful  in  its  decision  if  it  realizes  that  its  findings 
will  he  subjected  to  further  review  if  they  are  not  acceptable. 


* 


■ 


I 


52 

VII  ’ 

THE  PLAN  OF  THE  SENATE  COMMITTEE  ON  INTERSTATE  COMMERCE. 

Amid  tlis  large  group  of  plans  that  were  presented  providing  for  future 
railroad  legislation,  it  is  interesting  and  valuable  to  note  the  rjroposals  that 
were  presented  by  the  Senate  Committee  on  Interstate  Commerce.  A large  number 
of  the  ideas  were  formulated  by  United  States  Senator  Albert  Cummins  of  Iowa, 
chairman  of  the  committee;  they  are  constructive  in  type  and  indicative  of  the 
majority  of  methods  of  settlement  of  the  various  problems  as  they  were  presented 
by  the  other  parties  who  were  heard  by  the  committee. 


METHOD  OE  FEDERAL  CONTROL. 

It  was  recommended  that  the  Interstate  Commerce  Commission  be  continued 
with  enlarged  power  in  regard  to  rate  making  and  additional  power  over  financial 
affairs,  especially  the  establishment  of  a control  over  the  issuance  of  rail- 
road securities. 

There  was  also  a second  demand;  that  providing  for  the  formation  of  a 
Federal  Transportation  Board  to  have  a membership  of  five  members  to  be  appoint- 
ed by  the  President.  They  were  to  have  control  of  the  broader  and  underlying 
fundamentals  of  the  problem,  including  some  of  the  powers  presently  held  by  the 
Interstate  Commerce  Commission.  This  proposal  does  not  forward  a new  idea  to 
the  discussion,  rather  it  is  a repetition  of  the  plan  presented  by  the  railway 
executives  and  the  security  holders!  It  indicates  that  more  than  one  group  re- 
alized that  it  was  necessary  to  have  one  body  with  sufficient  numbers  and  of  the 

proper  type, clothed  with  the  reasonable  degree  of  authority  to  determine  the 

broader 


1 


Annal s of  the  American  Aeademy  of  Political 
p.  97. 


and  Social 


Science . 


. 


Nov . 


1919 


' 

. 


53 


policies,  since  the  Interstate  Commerce  Commission  was  so  heavily  burdened,  with 
the  functions  that  it  was  already  caring  for. 

Ue  should  not  be  too  ready  to  criticize  the  method  of  regulation  as  it  has 
gone  on  in  the  past,  however.  Hr.  Samuel  0.  Dunn  of  the  Railway  Age  would 

have  us  remember  that  "the  fact  that  the  old  system  of  regulation  has  had  some 

bad  as  well  as  seme  good  effects  by  no  means  proves  that  regulation  of  railroads 
cannot  be  made  a success.  Effective  regulation,  and  especially  effective 
regulation  by  commissions,  is  a comparitively  new  policy,  and  has  been  hardly 
tried  at  all  in  the  United  States  and  Canada.  It  was  not  reasonably  to  be  ex- 
pected that  a complete  success  of  it  would  be  made  from  the  start.  If  Congress 
will  correctly  appraise  both  the  past  failures  and  past  successes  of  regulation 
and  the  reasons  for  them,  and  change  the  old  system  as  experience  suggests  it 

should,  the  new  system  of  regulation  may  well  prove  a greater  success  than  any 

other  policy  which  the  government  could  adopt  in  dealing  with  the  railroads." 

It  is  quite  apparent  that  the  idea  was  conceived  of  in  light  of  the  success 
of  such  a body.  If  such  be  the  case,  the  point  cannot  be  over -emphasized  that 
the  efficiency  of  the  war  period  was  carried  for  the  sake  of  expediency  and  at 
the  expense  of  economy,  and  may  possibly  account  to  some  extent  for  the  present 
deficient  financial  condition  of  the  carriers.  Nevertheless,  the  essence  of 
the  plan  is  good.  There  should,  be  a determination  of  the  general  principles 
to  be  taken  up  in  the  details  of  legislation.  So  far  our  railroad  legislation 
has  been  restrictive,  not  constructive.  The  leaks  have  been  plugged  up,  by 
slip-shod  legislation,  only  to  the  subsequent  necessity  of  having  in  a few  years, 
to  close  up  another  leal:  in  the  immediate  proximity  of  the  original  flaw.  The 
determination  of  a broad  railroad  policy  would  require  the  repair  of  the  entire 

1 Annals  of  the  American  Academy  of  Political  and  Social  Science . Nov.  1919, 
pp.  15-15. 


54 

pot  at  one  sitting,  or  make  necessary  the  purchase  of  a new  container. 

HATS  MAKING-  POLICY. 

The  plan  provided  for  the  regular  method  of  rate  initiation  hy  the  carriers 
and  approval  by  the  Interstate  Commerce  Commission,  with  an  additional  feature 
which  provided  that  the  entire  country  he  divided  up  into  rate  districts  and 
the  railroads  into  rate  groups  for  rate  making  purposes.  This  feature,  es- 
pecially in  the  latter  part,  is  very  desirable.  It  is  an  indirect  method  of 
legalizing  rate  associations.  One  of  the  disagreeable  features  and  conflicts 
in  past  legislation  has  been  that  the  railroads  have  been  held  liable  for  dis- 
criminations, and,  on  the  other  hand,  have  not  been  permitted  to  form  rate 
agreements  or  traffic  associations.  To  be  sure,  the  existence  of  unrestricted 
cooperation  of  railroad  companies  may  become  vicious  but  without  cooperation  it 
is  absolutely  impossible  to  eliminate  all  discriminations  between  persons  and 
localities.  We  have  had  informal  traffic  associations,  which  have  been 
virtually  sanctioned  by  the  Interstate  Commerce  Commissions  but  they  have  not 
been  effective  or  strong  in  their  activities  because  of  the  continual  feat  of 
being  put  under  the  ban  of  anti-trust  legislation.  We  do  not,  of  course,  in 
the  United  States  want  to  be  subject  to  the  unscrupulous  possibilities  of  un- 
restricted monopoly,  but  we  should  not  attempt  to  control  or  regulate  monopolies 
by  forcing  the  laws  of  competition.  We  are  beginning  to  learn  that  the  rail- 
road must  be  operated  as  a monopoly  because  of  its  peculiar  type,  and  we  must 
treat  it  as  such  by  proper  monopoly  regulation  rather  than  by  competition 
regulation. 

Tlie  plan  further  proposed  that  rates  should  be  remunerative  enough  to  pro- 
vide carriers  with  a revenue  sufficient  to  pay  for  the  wages  of  labor  and  the 

1 Annal s of  the  American  Academy  of  Political  and  .Social  Science.  Hov.  , 1C-19, 

P-  23. 


. 


. 


. 


■ 

* 


55 


costs  of  operation,  with  a reasonable  amount  for  maintenance,  including  also 
taxes  and  a fair  return  on  the  value  of  the  corporate  property.  At  the  same 
time  due  consideration  must  be  given  to  the  shippers  and  the  employees,  as  well 
as  the  general  public  which  is  indirectly  affected  by  the  price  which  it  must 
pay  for  commodities'!’  Transportation  costs  or  charges  become  eventually  part  of 
commodity  price  in  the  sale  of  the  majority  of  commodities.  The  Interstate 

Commerce  Commission  has  often  been  criticized  for  not  having  given  sufficient 
consideration  to  all  railroad  costs  and  possibly  it  has  been  guilty  of  this 
offence.  It  is  very  difficult  to  please  all  of  the  parties  concerned.  The 
establishment  of  a rate  high  enough  to  take  care  of  the  necessary  railroad  ex- 
penditures will  often  be  more  than  the  shippers  are  willing  to  pay.  Further- 
more, there  are  those  in  the  group,  known  as  the  general  public,  who  are  favor- 
able to  rate  socialization,  a procedure  which  is  impossible  under  private  owner- 
ship unless  the  roads  are  recipients  of  aid  under  a program  of  government  sub- 
sidization, which  again  can  be  subjected  to  much  due  criticism. 

FINANCIAL  REGULATION. 

The  Senate  Committee  proposal,  along  with  others  that  we  have  noted  so  far, 
was  inclined  to  favor  an  exclusive  regulation  and  control  by  the  Interstate 
Commerce  Commission  over  issues  of  securities  and  the  purposes  for  which  funds 
so  secured  were  to  be  employed.  Mr.  Robert  Lovett,  who  has  previously  been 
quoted,  realizes  that  federal  government  control  of  securities  is  necessary,  not 
so  much  because  of  the  present  poor  cre.iit  ability  of  the  carriers,  but  rather 
because  so  many  states  have  established  control  that  any  one  large  system  is 
subject  to  a number  of  financial  masters;  in  order  to  secure  uniformity  then 
a national  regulation  is  desired.  Not  only  do  the  various  states  have  laws  of 

1 Annal s of  the  American  Academy  of  Political  and  Social  Science . Nov. , 1919, 
p.  93. 


- 


. 


. 


. 


. 


56 

varying  savor ity  "but  tlie  time  required  to  secure  approval  from  all  of  the  state 
authorities  is  too  long.  ’’Time  is  a vital  factor  in  transactions  involving  the 

sale  of  corporate  securities When  bankers  make  an  offer  for  an  issue  of 

bonds  or  stock  they  base  their  price  upon  current  financial  conditions  and 
quotations,  expecting  to  make  a quick  turnover.  If  they  are  required  to  wait 
for  the  delivery  of  the  securities  they  reduce  the  price  to  cover  the  risks  of 
financial  changes  in  the  meantime,  and  the  seller  gets  less  for  his  securities. 
....bankers  sometimes  will  not  buy  at  all — particularly  if  the  financial  world 

has  any  menacing  features If  a railroad  company  is  compelled  to  gc  to  half 

a dozen  state  railroad  commissions  for  permission  to  make  an  issue  of  stock  or 
bonds,  and  to  encounter  delays  running  from  weeks  to  months  on  account  of 
numerous  bearings  before  different  commissions,  and  in  meeting  their  conflicting 
policies  and  views,  before  it  can  deliver  the  securities,  it  will  be  impossible 
to  have  the  issue  underwritten,  or  if  underwritten  at  all  the  cost  will  be  ex- 
cessive. 

Also  the  many  financial  manipulations  which  still  recur  from  time  to  time, 
make  some  governmental  regulation  necessary;  on  the  other  hand,  it  is  very 
essential  that  the  Interstate  Commerce  Commission  be  not  too  exacting  in  the 
restrictions  which  they  may  place  on  the  expenditure  of  funds  secured  in  any 
bond  or  stock  issue,  for  railroad  officials  must  be  given  some  opportunity  to 
permit  their  managerial  ability  to  play  its  part  in  other  ways  than  in  proving 
to  the  commission  that  there  is  a necessity  for  a certain  amount  of  funds  for 
a certain  purpose.  If  the  managers  are  not  that  efficient,  then  our  jjrivate 
operation  method  must  be  discarded. 


1 R.  S.  Lovett,  Comments  on  the  Railroad  Problem,  pp.  51-2. 


' 

. 



H^|  I l.  l J.* 





1 


. 


' . 


' 

■ 


57 


TYPE  OF  OWNERSHIP. 

In  regard  to  ownership  and  operation,  the  Senate  Committee  recommended  that 
the  roads  be  returned  to  their  respective  owners  but  that  a plan  be  invoked 
which  would  make  possible  the  organization  of  the  railroads  into  20  to  35  com- 
peting companies — the  element  of  competition  is  still  emphasized  with  the  en- 
largement of  the  operating  unit.  That  competition  with  a reasonable  amount  of 
cooperation  is  desirable,  there  is  very  little  doubt.  The  increase  in  the  size 
of  the  individual  line  and  the  decrease  in  the  number  of  lines  is  recommended  to 
provide  for  a greater  operating  efficiency  and  to  stabilize  credit.  'Pill  a 
larger  system  provide  for  a greater  operating  efficiency?  Professor  E.  R. 
Dewsnup  of  the  University  of  Liverpool  is  of  the  opinion  that  a system  having 
ten  thousand  miles  of  track  has  reached  the  point  where  an  increased  mileage 
would  interfere  with  operating  efficiency.  Hie  question  has  been  asked  previous 
ly  but  it  can  bear  emphasis;  is  it  not  possibly  true  that  the  already  large 
operating  unit  accounts  to  some  extent  for  the  inefficiency  of  our  present  sys- 
tem? Mr.  Joseph  3.  Eastman,  a member  of  the  Interstate  Commerce  Commission 
has  this  point  in  mind  when  he  writes^"  that  "there  has  been  an  over-centraliza- 
tion. ...  there  should  be  a large  measure  of  'home  rule1,  so  that  all  minor 
policies  and  some  of  greater  moment  can  be  determined  on  the  spot."  Com- 
missioner Clark  sets  up  this  argument  against  regional  combination  or  roads 
and  against  nationalization  or  a unified  consolidation. 

These  statements,  of  course,  do  not  set  up  an  opposition  to  a program 
which  would  make  possible  the  addition  of  small  lines  to  large  systems  when 
they  furnish  good  feeding  lines  or  good  lateral  connections,  for  in  those  in- 
stances an  industrial  justification  can  be  established.  To  secure  a more 

1 Annals  of  the  Amor  lean  Academy  of  Political  and  Social  Science.  ITov.  . 1919 
p.  89. 


„ 


■ 

.... 


58 


stable  railroad  credit  is  desirable  and  necessary  but  our  railroads  are  already 
in  so  hazardous  a position  as  far  as  credit  is  concerned  that  we  must  take  on 
no  new  burdens.  The  possible  greater  efficiency  can  be  brought  about  by  pooling 
of  equipment  and  terminal  facilities  without  the  necessity  of  increasing  the  size 
of  the  operating  unit. 

PROVISIONS  FOR  COMPETITION  AND  CONSOLIDATION. 

There  was  mentioned  in  the  previous  division,  the  proposed  scheme  for  con- 
solidation.  There  are  one  or  two  considerations  in  addition  that  might  be 
mentioned  in  addition  that  were  provided  for  in  the  proposal.  (a)  Any  con- 
solidations contemplated  were  to  be  subject  to  the  sanction  of  the  Interstate 
Commerce  Commission.  (b)  Consolidations  could  be  voluntary  for  a period  of 
seven  years;  after  that  a compulsory  consolidation  was  to  be  arranged^  Mr. 
Walker  D.  Nines,  former  director-general  indicates  the  desirability  of  con- 
solidation in  the  following  words: — ”1  do  not  believe  these  fundamental  changes 
can  be  successfully  carried  through  except  by  the  construction  of  a comparative- 
ly few  great  systems,  each  of  which  will  so  combine  the  prosperous  and  un- 
pro  sperous  roads  so  as  to  present  a fair  average  result  and  get  away  from  the 

hopeless  diversity  in  earnings  which  has  existed  in  the  past;  and  upon  which  it 

2 

will  be  practicable  to  have  ample  Governmental  representations." 

Mr.  Thomas  Sisson  of  the  Guaranty  Trust  Company  favors  a somewhat  similar 
policy  when  he  remarks  that  "a  regional  railroad  system  based  on  natural  traffic 
conditions  would  meet  the  testa  of  economic  operation  and  of  economic  utiliza- 
tion of  railway  capital.  In  the  development  of  such  a system  we  should  be  able 
to  retain  all  of  the  advantages  that  come  from  individual  ownership  and  opera- 

1 Annal s of  the  American  Aicademy  of  Political  and  Social  Science , Nov.  , 1919, 
p.  92. 

2 A Solution  of  the  Railroad  Problem  in  Sight . p.  14. 


. 


. 


. 


. 


' • 

' ■ 


59 

tion.  ..at  the  same  time  avoid  the  evils  that  would  come  from  either  Government 

1 

ownership  or  from  a continuation  of  the  old  competitive  system..." 

It  cannot  "be  expected  that  voluntary  consolidation  will  come  about  success- 
fully for  the  successful  carriers  will  not  be  inclined  to  combine  with  a weaker 
road  unless  some  corporate  advantage  will  accrue  to  the  stronger  system.  In 
the  instance,  then,  that  a strong  road  feels  that  the  weak  line  will  act  as  a 
good  feeder  or  that  a capable  management  will  turn  inefficiency  into  success 
then  we  can  contemplate  voluntary  consolidations;  but  in  those  instances,  and 
they  represent  the  majority,  in  which  a weak  road  is  unproductive  because  of  an 
incorrectable  difficulty  such  as  a circuitous  route,  then  voluntary  consolidation 
will  not  be  made. 

FEDERAL  INCORPORATION. 

The  plan  mentions  Federal  incorporation  with  a requirement  that  each 
corporation  shall  include  in  its  Board  of  Directors  two  labor  members  and  two 
government  members.  This  indicates,  then,  that  though  such  a plan  would  pro- 
vide for  government  ownership,  there  would  still  be  private  operation — to  that 
extent  being  somewhat  similar  to  the  Plumb  Plan  which  shall  receive  considera- 
tion latex’.  There  is  an  excerption,  however,  in  that  the  Plumb  Plan  proposes 
that  the  participation  of  labor  representatives  shall  predominate.  It  may  be 

concluded  from  this  proposal  that  government  ownership  is  being  forced  because 
of  the  poor  financial  condition  of  the  carriers,  but  that  government  operation 
is  not  to  be  desired. 

LABOR  CONDITIONS. 

The  proposal  recommended  that  there  should  be  formed  a committee  of  eight 
members,  four  representing  the  employees  and  four  representing  the  carriers, 

1 Address,  American  Bankers  Association,  Chicago,  9-24-18. 


. 


. 


. 


60 


with  permission  to  appeal  to  the  proposed  Federal  Transportation  Board  in  the 
instance  of  a deadlock.  It  would  he  much  better  if  labor  problems  and  dif- 
ferences could  be  conciliated  without  the  intervention  of  a third  party;  some 
conciliatory  bodies  in  the  past  have  been  successful  enough  but  the  results  of 
their  efforts  are  usually  temporary! 

The  second  part  of  the  proposal  provided  that  the  decisions  of  the  Board 
were  to  be  final  with  the  further  provisions  that  strikes  and  lockouts  were  to 
be  forbidden.  It  is  reasonable  to  forbid  strikes  only  when  we  can  be  assured 
that  the  decisions  of  labor  boards  are  to  be  reasonable  and  just  to  all  parties 
■concerned;  a regulation  making  strikes  illegal  would  be  almost  too  reactionary 
in  our  present  economic  society. 


t 


♦ 

1 Mnals  of  the  American  Academy  of  Political  and  Social  Science.  Hov.  . 1919 
p.  So. 


. 


' 


61 


VIII 

THE  PLAIT  OF  THE  CITIZENS  NATIONAL  RAILROAD  LEAGUE . 

3Ir.  Nathan  L.  Arnater,  president  of  the  Citizens  National  Railroad  League 
presented  their  proposal  to  the  Senate  Committee  on  Interstate  Commerce.  Al- 
though the  plan  is  not  as  important  as  some  and  did  not  receive  as  much  atten- 
tion, it  is  worthy  of  some  consideration  in  that  it  presents  some  new  proposals 
not  mentioned  in  other  plans  and  some  entirely  new  methods  for  the  settlement 
of  some  of  the  problems  of  our  transportation  system.  It  emphasizes  more 
clearly  the  universal  relation  between  the  railroads  and  the  people  as  we  may 
observe  from  the  following  remark  made  by  Mr.  Arnster:-  ’’The  people,  who,  in  the 
main,  were  responsible  for  both  the  policy  and  the  form  of  railroad  control  of 
the  past  in  their  shortsightedness  overlooked  the  fundamental  fact  that  the 
railroad  industry,  intrisically  touches  the  very  heart  of,  and  indeed  is, 
democracy.  Its  services  come  nearer  to  being  a part  of  the  every  day  life  of 
the  people,  individually  and  collectively,  than  any  other  industry  or  institu- 
tion in  the  country.  Just  how  intimate  is  the  relation  between  the  railroads 
and  the  people  is  well  illustrated  by  the  fact  that  one-fifth  of  the  popula- 
tion of  the  country  have  a direct  or  indirect  proprietary  interest  in  the  rail- 
roads, either  through  ownership  of  stocks  or  bonds. . .Then,  when  one  considers 
the  millions  of  railroad  employees,  the  millions  engaged  in  the  manufacture 
and  production  of  the  fuel  and  supplies  used  by  the  railroads,  it  can  be  es- 
timated that  no  less  than  one-third  of  our  entire  population  is  most  vitally 
interested  in  the  railroads,  either  as  owners  or  by  dependence . 


1 Annal s of  the  American  Academy  of  Political  and  Social  Science , Nov. , 1919, 
p.  127. 


. 


. 


» 


62 


METHOD  OF  FEDERAL  COIITROL. 

Hie  plan  provided  for  the  continuance  of  the  Interstate  Commerce  Com- 
mission with  its  present  powers  and  the  added  authority  to  control  security 

# 

issues. 

It  also  provided  for  the  establishment  of  an  Efficiency  and  Economy  Board 
of  five  members  to  be  appointed  by  the  President  of  which  four  were  to  be 
selected  from  a list  presented  by  the  national  engineering  societies,  the  other 
to  be  selected  by  the  employees.  This  board  was  to  examine  the  physical  con- 
dition of  the  railroad  facilities,  study  operations  and  recommend  improvement 
in  physical  equipment  and  in  operating  methods!  This  suggestion  indicates 
that  the  originators  of  the  plan  recognized  the  existance  of  a physical  problem 
brought  about  by  the  failure  of  the  carriers  to  keep  their  equipment  up  to  par 
or  their  terminal  facilities  in  proper  working  order. 

The  advisability  of  adopting  their  procedure  for  settlement  is  more  dif- 
ficult to  ascertain.  Although  the  problem  mentioned  is  immediately  a problem 
of  engineering  and  the  physical  necessity  of  keeping  facilities  in  working 
order  is  recognized,  it  is  indirectly  a financial  problem,  and  with  that 
thought  in  mind  it  would  seem  that  a good  financial  system  would  relieve  the 
probability  of  insufficient  physical  improvements.  I do  not  think  that  the 
engineering  capacity  of  the  railroad  operation  executives  is  so  deficient  but 
that  if  they  were  provided  with  ample  funds  with  which  to  carry  on  the  necessary 
replacement  and  construction  programs,  that  they  would  have  any  difficulty  in  so 
doing.  Accordingly,  financial  adjustment  mast  be  resorted  to  to  solve  the 
difficulty  rather  than  the  establishment  of  a government  engineering  body  to 
determine  what  betterments  and  constructions  shall  be  contemplated  and  carried 


1 Senate  Hearings,  p.  1171. 


• - 


. 


■ 


S3 


out.  To  be  sura  some  railroads  have  made  useless  expenditures  for  construction 
and  equipment  purposes,  but  it  is  to  be  doubted  that  this  incongruity  is  one  of 
the  more  outstanding  inconsistencies  in  the  majority  of  cases  or  for  the  greater 
number  of  the  carriers. 

RATE  MAKING  POLICY. 

All  rates  were  to  be  initiated  by  a single  privately  owned  corporation, 
with  a regulation  by  the  Interstate  Commerce  Commission  similar  to  that  existing 
at  present!  There  was  to  be  legislation  passed  providing  that  rates  should  be 
adequate  to  produce  income  great  enough  to  cover  all  of  the  operating  expenses 
and  the  fixed  charges,  and  maximum  dividends  not  to  exceed  6 per  cent,  with  a 
surplus  not  to  exceed  two  per  cent  of  all  3tock  outstanding.  That  rates 
sufficient  to  cover  all  of  the  items  mentioned  is  the  desirable  circumstance 
cannot  be  disputed,  but  rates,  to  be  so  fixed  as  to  meet  these  exacting  require- 
ments, would  have  to  be  initiated  and  constructed  in  a manner  much  different 
and  much  more  complicated  from  that  employed  at  present?  In  the  first  place, 
if  the  rates  are  to  be  uniform  for  all  lines  in  a competing  territory  under  this 
proposal,  then  the  method  presupposes  that  all  railroads  have  the  same  cost  of 
operation.  Since  the  costs  of  operation  even  in  the  same  territory  for  com- 
peting lines  vary  greatly,  then  to  secure  the  uniformity  of  return  for  each  road 
as  indicated  in  this  proposal  would  require  rates  to  differ  for  different  roads. 

A variance  of  rates  in  the  same  territory  would  be  undesirable  in  that  it  would 
cause  personal  and  locality  discriminations;  the  shippers  on  the  more  successful 
line  would  get  the  advantage  of  a cheaper  rate  in  the  marketing  of  their 
commodities.  Though  income  uniformity  for  all  roads  is  desirable  to  some  extent 

1 Senate  Hearings,  p.  1174. 

2 Annal s of  the  American  Academy  of  Political  and  Social  Science . ITov. , 1919, 
p.  1174. 


• * 


64 


it  is  impossible;  rates  within  the  same  territory  must  be  the  same  and  the  more 

efficient  carrier  must  be  permitted  to  receive  a larger  net  return, 

We  find  a further  recommendation  in  the  plan  for  a government  guarantee  of 

a 4/j  dividend  on  all  stock  issued  by  the  corporation  with  the  provision  that  a 

maximum  dividend  of  6}o  shall  be  paid  when  earned,  with  the  additional  provision 

that  all  in  excess  of  6 per  cent,  shall  be  distributed  40  per  cent,  to  labor, 

30  per  cent,  to  the  public  for  improvements  and  the  retirement  of  outstanding 

1 

stock  and  30  per  cent  to  the  stock  holders.  A provision  guaranteeing  a stock 
dividend  would  have  the  good  effect  of  attracting  capital  to  the  railroad 
field,  but  might  have  the  detrimental  effect  of  cutting  down  private  initiative, 
Mr.  Hines  is  of  the  opinion  that  "whenever  you  get  to  the  point  of  prescribing 
a standard  of  return  which  must  be  realized  you  have  created  a sort  of  a Govern- 
ment guaranty.  To  my  mind,  the  great  problem  is  whether  to  have  this  guaranty 
certain  or  uncertain.  Cf  course,  the  mors  certain  the  guarantee,  the  less 
initiative  on  the  part  of  the  management.  Or.  the  other  hand,  while  a less  cer- 
tain guarantee  stimulates  initiative,  it  also  is  less  promising  to  capital  and 
tends  to  defeat  the  ultimate  objective,  which  is  the  attraction  of  adequate 
capital  into  the  business. " 

FINANCIAL  REGULATION. 

Tlie  Amster  Plan  provides  for  the  organization  of  one  privately  owned  and 
operated  railroad  company  with  full  public  control.  The  valuation  at  'which 
each  railroad  shall  enter  the  consolidation  shall  be  determined  by  a three-fold 
method;  averaging  original  cost  less  depreciation,  replacement  costless  de- 
preciation and  net  earnings  over  the  last  ten  years  capitalized  at  5 per  cent. 

1 Waterman,  Nation.  Nov.,  1919. 

2 1".  W.  Cook,  A Solution  of  the  Railroad  Problem  in  Sight . p.  14. 


. 


. 


. . . 


65 

The  desirability  of  including  the  item  of  original  cost  is  open  to  criticism; 
if  a railroad  has  hesn  progressive  and  had  advanced  the  value  of  the  corporation 
far  beyond  the  original  capital  outlay  the  original  cost  should  no  longer  be  con- 
sidered. On  the  other  hand,  if  a promotion  has  not  succeded  it  would,  no  doubt, 
be  fair  enough  to  consider  to  a reasonable  extent  the  original  cost  for  the  bene- 
fit of  the  victimized  investors. 

FEDERAL  INC0RP0RATI01T. 

The  proposed  single  corporation  shall  be  formed  by  exchanging  stock  in  the 
new  corporation  for  stock  in  the  existing  corporation  on  a basis  as  above  de- 
termined or  by  the  valuation  of  the  Interstate  Commerce  Commission.  The  National 
Corporation  should  have  a working  capital  of  $500,000,000  and  the  power  to  buy 
and  sell  directly  railroad  securities  of  all  kinds,  and  also  the  right  to  con- 
demn^ It  is  very  doubtful,  whether  or  not  a capitalization  so  small  would  be 
sufficient  for  an  institution  whose  physical  outlay  is  estimated  to  be  -worth  at 
least  $20,000,000,000.  There  was  a provision  for  a board  of  directors  to  have 
eleven  members,  including  one  director  representing  the  Interstate  Commerce 
Commission,  two  commerce  and  industry,  two  the  agricultural  interests,  three 
the  stockholders,  and  two  representing  labor.  This  plan  represents  the  last 
step  before  Government  ownership.  Mr.  Minster  felt  that  ’’the  provision  for  com- 
plete unification  and  for  a managing  and  controlling  board  composed  of  representa- 
tives democratically  selected. . . .would  protect  the  country  against  graft  and 

profiteering,  manipulation  and  financial  exploitation,  in  the  conduct  of  the 
2 

transportation. ” 

These  harmonious  features  are  very  desirous  but  they  have  been  well  pro- 
vided for  in  the  government  regulation  of  the  last  forty  years;  the  more  out- 

1 Annal a of  the  American  Ac ademv  of  Political  and  Social  Science . ITov.  , ISIS, 
pp.  130-131. 

2 Ibid.,  p.  131. 


■ 


9 1 n 


. 

■ 

I 


. 


' 


■ 


65 


standing  problem  at  the  present  time  is  the  provision  of  an  adequate  service 
rather  than  the  elimination  of  discriminations.  It  is  also  to  be  feared  that 
a single  operating  company  would  be  unv.ieldly  and  cumbrous;  we  should  be  able 
to  acquire  all  of  the  benefits  and  none  of  the  detrimental  features  of  such  a 
plan  by  a more  constructive  program  of  government  regulation. 

LABOR  CONDITIONS. 

The  plan  provides  for  voluntary  committees  of  laborers  and  the  coloration 
to  determine  wage  differences  and  working  conditions,  the  decisions  to  be  bind- 
ing on  neither  party.  In  the  event  of  a deadlock,  differences  were  to  be 
settled  by  the  Interstate  Commerce  Commission. 


37 


IX 

THE  PLAIT  OF  THE  NATIONAL  TRANSPORTATION  CONFERENCE. 

Ho  discussion  of  plans  presented  to  the  Senate  Committee  would  be  complete 
without  the  consideration  of  the  proposals  submitted  by  the  National  Transporta- 
tion Conference  held  under  the  auspices  of  the  United  States  Chamber  of  Commerce. 
The  Conference  gave  careful  attention  to  all  of  the  other  plans  that  had  been 
presented  with  the  thought  in  mind  of  including  in  its  plan  a summarization  of 
all  desirable  proposals.  All  of  the  groups  interested  in  transportation  prob- 
lems were  present  at  the  meetings  of  the  conference  including  employees,  farmers, 
economists,  railway  executives,  bankers,  security  holders,  and  the  directors- 
general  of  the  railroads  during  the  period  of  the  World  War.  After  having 
heard  the  ideas  suggested  by  each  of  the  groups  mentioned,  the  Railway  Committee 
of  the  United  States  Chamber  of  Commerce  presented  its  program  for  changes  and 
improvements  in  railroad  legislation,  the  more  important  features  of  which  are 
enumerated  and  analyzed  in  the  following  paragraphs. 

METHOD  OF  FEDERAL  CONTROL. 

The  members  of  the  Transportation  Conference  recognized  that  the  Interstate 
Commerce  Commission  had  performed  a task  of  great  magnitude  during  the  period  of 
their  establishment.  It  accordingly  recommended  that  the  body  be  continued 
with  its  present  authority  over  rates  and  regulations,  with  the  provision  that 
legislative  enactment  provide  for  a greater  power  of  the  Interstate  Commerce 
Commission  over  interstate  traffic  in  the  event  that  greater  cooperation  could 
not  be  secured  between  the  Interstate  Commerce  Commission  and  the  variou.3  state 
commissions.  It  was  further  recognized  that  the  Commission  needed  the  assistance 


. 


. 


68 

of  some  local  bodies  in  the  immediate  territory  in  which  the  changes  were  being 

made,  and  accordingly  recommended  that  some  type  of  local  agency  be  established, 

1 

indicating  that  possibly  the  aid  of  state  commissions  could  be  solicited.  Of 
more  prominence  in  the  hearings,  was  the  recommendation  for  the  establishment  of 
a Federal  Transportation  Board;  it  was  believed  that  the  Interstate  Commerce 
Commission  ought  not  to  be  burdened  with  the  addition  of  new  tasks.  Further- 
more, the  Federal  Transportation  Board  was  to  be  given  a number  of  broad  ad- 
ministrative functions  contemplated  in  the  proposed  plan  for  remedial  legisla- 
tion, which,  if  added  to  the  present  functions  of  the  Commission,  would  serious- 
ly interfere  with  the  prompt  action  of  that  body.  The  Conference  further  held 
that  the  Commission  was  originally  organized  for  the  purpose  of  regulating  rates. 
The  Federal  Transportation  Board  was  to  have  five  members  appointed  by  the 
President  for  the  enforcement  of  the  following  specific  duties: — 

(a)  To  regulate  security  issues  and  capital  expenditures. 

(b)  To  settle  wage  controversies  after  deadlocks  when  conciliation  boards  were 
unsuccessful . 

(c)  To  supervise  and  determine  the  consolidation  of  roads. 

(d)  To  promote  problems  having  to  do  with  a national  system  of  railways,  high- 
ways and  waterways. 

(e)  To  inquire  into  the  practices  of  railroad  management  and  to  propose  measures 
for  preventing  abuses  therein. 

(f)  To  appoint  the  directors  that  shall  represent  the  government  upon  the 

2 

directorates  of  the  proposed  consolidated  railroad  companies. 

A board  of  this  type  would  concentrate  an  executive  task  of  first  magnitude 
in  the  hands  of  the  government,  to  be  sure.  Hie  duties  mentioned  would  give 

1 Fat ional  Tr an spor t at i on  Conference . pp.  14-15. 

2 national  Transportat ion  Conference f p.  16. 


69 

it  the  responsibility  of  developing  an  adequate  and  efficient  national  system  of 
transportation. 

RATE  MAKING  POLICY. 

The  proposal  provided  for  the  initiation  of  rates  by  the  carriers  as  had 
been  the  program  in  the  past,  with  the  institution  of  a statutory  rule  which  pro- 
vided that  those  roads  receiving  an  income  of  more  than  six  per  cent,  per  annum 
upon  a fair  value  of  their  property  were  to  be  required  to  put  half  of  the  ex- 
cess into  a company  contingent  fund  until  that  fund  should  amount  to  six  per 
cent  of  the  fair  value  of  the  company's  property,  while  the  other  half  of  the 
excess  was  to  be  turned  over  to  a general  railroad  contingent  fund  to  be  ad- 
ministered by  trustees  appointed  by  government  authority,  and  to  be  used  for  the 
benefit  of  all  of  the  railroads  of  the  country.  VJhen  any  particular  road  had 
brought  it 3 contingent  fund  up  to  six  per  cent,  of  the  fair  value  of  its 
property,  the  company  was  to  increase  its  annual  contribution  to  the  general 
contingent  fund  to  two-thirds  of  its  net  income,  the  other  one-third  of  the  ex- 
cess being  retained  by  the  company  for  distribution  among  the  stockholders  or 
for  ether  lawful  purposes.  This  additional  feature  was  added  in  order  to  pro- 
vide for  keeping  the  income  of  any  particular  road  within  limits  and  at  the 

same  time  to  provide  incentive  and  interest  to  the  managers  of  the  prosperous 

1 

roads. 

It  must  be  further  considered,  however,  whether  there  is  sufficient  pro- 
vision for  incentive.  Hie  purpose  of  the  fund  is  to  stabilize  railroad  credit 
without  making  the  government  responsible  for  a fixed  return  to  the  individual 
roads.  Hie  outstanding  advantage  of  this  method  is  that  it  protects  the  public 

1 Nat i onal  Tr an sro r t at i on  Conference,  p.  17. 


. 


, 


. 


70 


from  unreasonable  rates.  The  regular  method,  of  rate  making  makes  it  necessary 
to  maintain  a rate  high  enough  to  permit  the  poorest  road  to  meet  its  obligations 
It  is  further  proposed,  also,  that  if  the  total  general  contingent  fund  eventually 
amounts  to  more  than  $750,000,000  that  the  surplus  shall  go  to  the  United  States 
Treasury  or  to  be  used  for  the  construction  of  new  facilities.  It  is  very 
apparent  that  the  systemsof  controlling  income  that  are  prominent  in  Europe  are 
prominent  in  this  plan,  especially  the  German  method. 

FINANCIAL  REGULATION. 

The  plan  in  regard  to  the  regulation  of  finance  provides  that  there  shall 
be  complete  regulation  of  capital  expenditures  and  security  issues  by  the 
Federal  Transportation  Foard.  We  can  observe  the  words  of  the  plan  as  ex- 
pressed when  presented  to  the  Senate  Committee  : — 

11  (a)  It  is  necessary  first  tc  determine  the  public  necessity  for  the  pro- 
posed expenditure  of  capital.  The  Federal  Board  making  this  determination  must 
pass  upon  the  wisdom  or  unwisdom  of  proposed  construction  of  new  lines  or  term- 
inals or  other  facilities.  The  authority  which  exercises  this  power  will  in 
reality  determine  the  direction  and  scope  of  the  future  development  of  the 
American  railway  Transportation  system. 

"(b)  When  capital  expenditures  have  been  authorized  and  a certain  public 
convenience  has  been  issued  authorizing  the  construction  of  a proposed  line  or 
terminal,  the  Federal  Board  must  decide  what  kinds  and  what  .amounts  of  securities 
may  be  issued  and  must  fix  the  minimum  prices  at  which  the  authorized  securities 
may  be  offered  for  sale. 

"(c)  As  tile  authorized  expenditures  are  spent  in  construction  work, 
periodic  reports  from  the  railroad  companies  should  be  required  by  the  Federal 
Board  showing  what  uses  arc  being  made  of  the  funds  obtained  from  the  sale  of 


. 


71 


authorized,  issues  of  securities.  ’’ 

A great  benefit  can  be  derived  by  an  effective  Government  regulation  of 
security  issues  and  expenditures.  The  public  will  be  protected  from  the  re- 
occurrence of  railroads  ruined  by  in-proper  financial  manipulation,  and  shippers  ' 
and  the  general  public  will  be  aided  by  the  elimination  of  the  evils  of  ir- 
responsible financing. 

TYPE  OF  OWNERSHIP. 

It  was  provided  that  there  should  be  a grouping  or  consolidation  of  the 
railroads  of  the  United  States  within  a reasonable  time  into  twenty  or  thirty 
systems  in  order  that  railroad  rates  might  be  the  same  for  all  roads,  weak  or 
strong,  without  impairing  their  income.  To  be  sure,  it  is  to  the  interest  of 
the  general  public  not  to  have  railroad,  rates  sc  high  that  the  strong  roads  shall 
reap  a large  profit,  or  30  law  as  to  make  the  weak  roads  absolutely  dependent 
and  subject  to  bankruptcy.  It  was  felt  by  the  Conference  that  such  consolida- 
tion would  make  roads  in  all  sections  of  the  country  of  more  nearly  equal 
strength. 

FEDERAL  IIJCORPORATIOH. 

There  was  a strong  feeling  that  there  should  be  a change  of  allegiance  of 
the  railroad  corporations  from,  the  states  to  the  Federal  government.  Accord- 
ingly) it  was  provided  that  as  railroads  consolidated,  the  sanction  for  such 
consolidation  was  to  be  secured  from  the  Federal  government  and  from  that  time 
on  the  Federal  authorities  were  to  have  complete  control  over  the  systems.  It 
is  a contentious  point  as  to  whether  or  not  a railroad  can  be  compelled  to  give 
up  a state  charter,  but  the  enactment  of  such  legislation  could  provide  for 

1 national  Transportation  Conference , p . 53 . 


' 


. 


. 

- 


72 

voluntary  consolidation  such  as  is  provided  for  in  national  Bank  Act.  However, 

it  was  provided  that  states  should  retain  the  power  of  local  taxation  and  police 

1 

regulation. 

LABOB  CONDITIONS. 

Labor  problems  were  taken  care  of  by  a provision  in  which  adjustment  of 

wages,  and  ether  conditions  of  the  service  were  to  be  taken  care  of  by  boards 

consisting  of  equal  numbers  of  representatives  of  employees  and  officers  of  the 

railroads  with  appeal  in  case  of  deadlock  to  the  Federal  Transportation  Board. 

It  was  further  recommended  that  each  large  railroad  be  required  to  have  within 

its  directorate  at  least  one  representative  of  labor  to  be  nominated  for  that 

position  by  the  employees.  This  recommendation  at  first  hand  seems  fair  enough; 

however,  there  is  the  tendency  for  a laborer  out  of  his  environment  to  forget  the 

group  that  he  represents  and  take  on  a sympathetic  attitude  with  those  with  whom 

he  is  directly  thrown  in  contact.  Furthermore,  it  is  very  doubtful  whether  one 

labor  member  in  a large  directorate  would  have  any  great  opportunity  to  voice 

2 

his  expression  or  to  receive  any  sanction  and  support  of  his  opinions." 


1 National  Tr ansn or t at  ion  Conf  erence . pp.  12-1.3. 

2 National  Transuortatioh  Conference . p.  13. 


* 

* ‘ 


73 

X 

THE  PLUMB  PLAIT. 


We  now  come  to  observe  the  last  of  the  seven  selected  plans  proposed  for 
railroad  legislation,  that  suggested  by  hr.  Glenn  E.  Plumb,  general  counsel  for 
the  Railway  Brotherhoods.  It  perhaps  has  received  more  attention  and  has  been 
subjected  to  more  criticism  than  any  of  the  plans  that  we  have  observed;  possibly 
more  than  all  of  the  ether  plans  combined.  Why  has  it  received  so  much  atten- 
tion? Because  it  was  presented  by  the  labor  forces  whose  every  proposition  is 
closely  watched,  and  because  its  recommendations  were  more  than  merely  transitory. 
The  plan  of  the  railroad,  brotherhoods  contemplated  a permanent  solution  of  the 
railroad  problem;  stressed  broad  principles  rather  than  ordinary  details. 
Furthermore , it  was  outstanding  because  it  was  the  only  important  plan  presented 
that  provided  for  the  substitution  of  government  ownership  for  private  ownership. 
The  very  conservative  press  would  terra  the  plan  as  follows:—  "For  sheer  dis- 
regard of  all  interests  save  only  one,  the  interest  of  the  employees  as  the 
employees  conceive  their  interest,  the  plan  of  railroad  operation  now  indorsed 
by  the  four  railway  brotherhoods  goes  the  full  limit... As  an  economic  conception 
the  Plumb  plan  is  unsound  and  fraudulent ...  In  fact  it  is  so  little  the  right 
kind  of  thing  and  so  much.  Bolshevistic  that  its  promulgation  i3  a positive  blow 
to  the  vast  campaign  toward  real  cooperation  in  management.."^  Mr.  Joseph 
Eastman,  a member  of  the  Interstate  Commerce  Commission  shows  much  more 
logically  why  labor  makes  the  demands  that  it  does  when  he  reports: — "The 
laborer  has  too  often  been  regarded  as  a mere  tool  of  production  rather  than  as 


1 Boston  Transcript . February  7,  1S19. 


74 


a human  partner  in  the  enterprise,  and  has  lacked  human  interest  in  his  work. 

No  douht,  this  situation,  so  far  as  it  exists  upon  the  railroads,  may  he  im- 
proved h y changes  in  methods,  under  private  ownership;  but  it  may  more  readily 
he  remedied  under  national  operation. 

" Moreover,  with  all  of  the  railroads  under  a single  governmental  con- 

trol, the  policy  of  giving  labor  a voice  and  public  interest  in  the  conduct  of 
the  business  can  more  easily  be  adopted  and  carried  into  uniform  and  successful 
practice. 

"The  very  fact  that  the  railroad  employees  themselves  favor  the  nationaliza- 

1 

tion  of  the  roads  would  simplify  the  task....'1 2 

•The  plan,  when  it  is  reviewed  closely  as  to  its  details,  has  only  one  re- 
actionary feature  in  that  it  recommends  government  ownership.  We  cannot  ex- 
pect that  the  proposal  would  be  other  than  favorable  to  labor,  and  it  can  further 
be  remarked  that  railroad  labor  is  to  some  extent  justified  in  demanding  a 
greater  recognition  than  it  has  been  accorded  in  the  past.  As  we  delve  into 
the  proposals  of  the  plan  it  shall  be  noted  that  government  operation  was 
apparently  not  demanded  or  desired? 

METHOD  OF  FEDERAL  CONTROL. 

The  Plumb  Plan  recommended  that  the  Interstate  Commerce  Commission  be  re- 
tained with  its  present  rate  making  powers.  It  was  further  provided  that  there 
be  established  a Railway  Board  of  Appraisement  and  Extension  to  be  composed  of 
the  nine  members  of  the  Interstate  Commerce  Commission  and  three  members 
selected  by  the  lirectors  of  the  Corporation.  Their  duty  is  to  determine  the 
amount  of  compensation  to  be  paid  to  the  present  owners  of  the  roads  and  the 


1 Anna! s of  the  American  Ac ademy  of  Political  and  Social  Science . p.  87. 

2 Senate  Hearings,  p.  994. 


75 

amount  to  be  spent  for  new  extensions  and  improvement.  It  would,  of  course, 
be  necessary  to  have  such  a board,  or  a similar  one,  to  provide  for  the  trans- 
ition from  private  ownership  to  government  ownership. 

HATE  MAKING  POLICY. 

Hie  proposal  provided  that  all  rates  were  to  be  initiated  by  the  national 
Railway  Operating  Company,  the  plans  for  which  shall  be  discussed  hereafter. 

All  rates  were  to  be  regulated  and  approved  by  the  Interstate  Commerce  Commiss- 
ion and  any  deficit  was  to  be  paid  by  the  United  States  government  in  case  the 
rates  did  not  provide  a sufficient  income  for  any  fiscal  period.  Any  surplus 
earnings  existing  after  operating  expenses  and  fixed  charges  were  paid  were  to 
be  distributed  one-half  to  the  government  and  one-half  to  the  employees.  A 
provision  was  made  for  what  may  be  termed  a socialization  of  rates  by  a process 
of  automatic  rate  reduction.  Uhen  the  government’s  share  of  earnings  in  a 
given  year  exceeded  five  per  cent,  of  the  gross  operating  revenue,  rates  were  to 
be  reduced  by  the  Interstate  Commerce  Commission  to  absorb  this  excess  resulting 
in  a five  per  cent,  reduction  in  the  general  rate  level.  "This  would  act  as 
an  automatic  check  on  operating  income  in  excess  of  the  requirements  of  opera- 
tion, and  would  develop  a constant  tendency  to  a reduction  in  the  cost  of 
operation. 

FINANCIAL  REGULATION. 

All  railroad  securities  were  to  be  issued  by  the  United  States  government — ■ 
it  was  contended  that  the  government  issues  of  securities  would  attract  capital 
to  the  railroad  field  because  of  the  element  of  security;  the  speculative 
feature  would  be  eliminated  because  a return  in  the  form  of  interest  is  guaran- 
teed. 

1 Senate  Hearings,  pp.  1001-1002. 


* 


' 


- 


75 


Likewise  all  capital  fund  expenditures  were  to  be  made  by  the  United  States 
government,  as  far  as  possible  out  of  excess  earnings;  beyond  that  by  a taxa- 
tion of  the  community  that  benefited  by  the  extension.  It  would  be  a process  of 
some  difficulty  to  determine  what  individuals  benefited  directly  or  indirectly 
from  the  construction  of  any  particular  new  addition.  If  any  particular  local- 
ity did  not  benefit  from  any  new  construction,  then  the  entire  amount  was  to  be 
provided  for  by  the  United  States  government,  if  the  Interstate  Commerce  Com- 
mission deemed  that  the  proposed  program  was  to  the  public  interest. 

We  have  the  reoccurrence  of  an  old  objection  in  that  too  many  duties  would 
be  given  to  a single  commission  of  the  size  of  the  present  Interstate  Commerce 
Commission. 

TYPE  OF  OWNERSHIP. 

All  roads  were  to  be  6wnod  by  the  United  States  government.  The  company 
was  to  be  operated  by  a corporation  composed  of  the  railroad  employees,  thus 
providing  for  government  ownership  but  private  operation.  In  order  to  provide 
more  efficiency  and  "to  prevent  carelessness  in  regard  to  expenditures,  which 
frequently,  almost  habitually  accompany  government  operation,"  a national  Hail- 
ways  Operating  Company  was  to  be  created  to  operate  under  a lease  agreement  the 
roads  which  had  been  taken  over  by  the  government.  It  is  apparent  that  private 
operation  was  to  accompany  government  operation  from  the  content  of  this  remark. 
The  capital  stock  of  this  corporation  was  to  be  held  in  trust  for  the  benefit  of 
the  employees;  there  was  to  be  no  paid-in  capital.  There  was  to  be  "an 
operating  corporation  where  operating  ability  would  constitute  its  sole  capital’.’^ 

As  a rental,  the  corporation  was  to  pay  the  government  any  balance  existing 
after  operation  costs  and  maintenance  funds  had  been  provided  for  and  an  amount 


1 Senate  Hearings,  p.  996. 


9 


77 


large  enough  set  up  to  pay  the  fixed  charges  on  bonded  indebtedness  and  suffic- 
ient to  set  up  a sinking  fund  to  retire  obligations.  Of  the  earnings,  the 
government 1 2 3 s share  was  to  be  used  for  the  purpose  of  malting  additions  and  better- 
ments and  for  the  accumulation  of  a sinking  fund;  the  corporation’s  share  "con- 
stituted a sinking  fund  to  be  declared  as  a dividend  upon  the  amounts  paid  to 
the  labor  which  it  employs,  every  employee  from  president  to  office  boy,  that 
proportion  of  the  trust  fund  which  his  annual  wage  bore  to  the  total  annual  com- 
pensation of  all  employees."^ 

FEDERAL  INCORPORATION. 

Hie  period  of  federal  incorporation  under  the  National  Railways  Operating 

Company  was  to  be  for  one  hundred  years.  There  was  to  be  a Board  of  Directors 

of  fifteen  members,  five  elected  by  the  classified  railroad  employees,  five 

elected  by  the  operating  officials,  and  five  by  the  President  of  the  United 

States.  The  duties  and  powers  of  this  board  were  to  be  similar  to  those  of 

2 

directorates  under  our  system  of  private  ownership. 

LAiBOR  CONDITIONS.  / 

Employee  classification,  conditions  of  employment,  working  rules,  and  wages 
were  to  be  determined  by  the  Board  of  Directors.  Disputes  were  to  be  settled  by 
a central  board  and  a number  of  subsidiary  boards  consisting  of  five  representa- 
tives of  the  classified  employees  and  five  representatives  of  the  operating 

3 

officials.  Deadlocks  were  to  be  referred  to  the  Board  of  Directors" 

As  was  mentioned  oarly  in  the  chapter,  the  Plumb  Plan  has  been  subjected  to 
a large  amount  of  criticism  because  it  is  so  contrary  to  our  present  program. 

1 Senate  Hearings,  p.  998. 

2 Waterman,  Nation.  Nov.,  1919. 

3 Annal s of  the  American  Academy  of  Political  and  Social  Science.  Nov. , 1919, 
p.  96. 


. 


. 

' 


■ 


. 


jj  • 1 
'■  1 1 


. 


. 

■ 

. . 


73 

Only  a few  of  the  opinions  pro  or  con  have  been  presented  in  this  paper  because 
they  are  all  more  or  less  biased  in  their  expression.  We  are  all  .more  or  less 
familiar  with  the  arguments  for  and  against  government  ownership;  whether  or  net 
they  are  applicable  to  this  particular  plan  is  a matter  of  conjecture.  Whether 
we  be  for  or  against,  it  may  be  said  for  the  Plumb  Plan  that  it  represents  the 
true  philosophy  of  labor  as  it  is  presented,  not  alone  in  the  United  States,  but 
throughout  the  world,  and  every  indication  would  lead  us  to  believe  that  we  are 
nearing  government  ownership  in  every  generation.  To  notice  the  words  of  the 
originator  of  the  plan: — 

11  The  coming  order  will  treat  capital,  producers,  and  consumers  alike.  The 
need  of  society  when  expressed  in  a franchise  is  just  as  essentially  an  invest- 
ment in  industry  as  is  the  investment  made  by  the  capital  or  the  investment  made 
by  labor.  This  is  vital,  living,  human  interest These  who  made  this  in- 

vestment are  entitled  to  a voice  in  the  control  of  the  industry  to  see  that  their 
investment  is  properly  protected  and  that  no  deceit  shall  be  practised  upon 
these  investors  in  any  matter  affecting  their  interest  in  the  conduct  of  industry. 
They  invest  the  other  vital  element  in  industry,  the  power  that  creates.  If 
their  position  as  an  investor  is  recognized,  then  they,  too,  become  imbued  with 
the  motive  which  actuates  all  investors — to  increase  quantity  and  improve 
quality,  thereby  reducing  cost.”1 

Possibly  the  United  States  is  still  too  individualistic  to  assume  any  plan 
for  government  ownership;  the  trend  of  opinion  and  proposals  which  we  have  ob- 
served indicates  that,  but  the  statement  can  be  made  with  assurance  that  we 
are  tending  toward  that  type  of  industrial  advancement  which  accords  to  the 
laborer  a greater  consideration  for  his  interest  and  his  investment. 


1 ^lals  of  the  African  Academy  of  Political  and  Social  Science  Uov  l^c 
PP.  225-3.  ' ’ “ 


i 


. 


. 


■ 

. 


■ 


79 


XI 

CONCLUSION. 

Tliere  are  a number  of  other  proposals  and  plans  for  new  legislation  that 
might  have  been  presented,  many  of  which  had,  no  doubt,  meritorious  presenta- 
tions, that  would  have  been  helpful  to  the  solving  of  this  far-reaching  and 
difficult  railroad  problem.  From  the  great  number  presented,  3even  have  been 
chosen  because  they  wer e representative,  from  the  most  conservative  to  the  most 
reactionary;  from  the  merely  transitory  to  those  that  presented  means  of  per- 
manent solution;  representing  all  groups  who  were  directly  interested  in  the 
settlement  of  the  railroad  problem  and  the  general  public  as  well;  from  those 
governmental  bodies  that  have  been  experienced  through  long  periods  of  trial  in 
railroad  regulation,  especially  the  Interstate  Commerce  Commission. 

Among  the  important  plans  omitted  it  might  be  well  to  mention  the  sugges- 
tions for  transitory  regulation  laid  down  by  Director s-General  IIcAdoo  and  Hines, 
both  of  whom  favored  a five-year  period  of  trial  of  government  operation  during 
a period  of  peace  and  normality.  Bankers,  among  them  Otto  Kahn  and  Paul  War- 
burg,  made  recommendations  especially  emphasizing  the  needs  for  giving  aid  to 
provide  capital  stability  and  rate  increases  sufficient  to  give  the  roads  a work- 
ing reserve.  Farmers  were  interested  to  see  that  their  problems  were  cared  for. 
Of  these  latter  suggestions,  none  were  taken  u_  in  complete  programs  usually; 
rather  only  a partial  statement  of  a few  of  the  defects  and  general  recommenda- 
tions for  settlement.  Furthermore,  nearly  all  of  the  ommitted  proposals,  ex- 
cept possibly  for  their  minor  features,  were  taken  care  of  or  substantially 
taken  account  of  in  acme  one  of  the  seven  plans  analyzed. 

In  conclusion,  it  will  be  seen  that  there  is  considerable  unanimity  of 


. 


, 


. 


■ 


. 


30 


opinion  as  to  the  most  outstanding  defects  and  the  general  methods  of  settle- 
ment. All  plans  seem  to  indicate  a favorable  attitude  toward  federal  incorpora- 
tion except  the  Interstate  Commerce  Commission’s  proposal.  Consolidations  seem 
to  be  favored,  many  of  the  plans,  however,  emphasizing  a continuation  of  com- 
petition as  a feature  of  our  railroad  system.  It  seems  to  be  the  concensus  of 
opinion  that  rates  must  be  so  made  as  to  provide  sufficiently  for  all  the  ex- 
penses of  operation  and  for  the  payment  of  fixed  charges.  A common  means  of 
settlement  is  usually  proposed  for  labor  difficulties;  the  creation  of  voluntary 
boards,  with  equal  representations  to  settle  controversies.  It  is  urged  also 
that  either  the  Interstate  Commerce  Commission  shall  have  broader  powers  or  that 
a special  transportation  board  shall  be  created  to  function  over  the  broad 
problems,  indicating  that  our  program  in  the  past  has  been  too  much  in  favor  of 
the  settlement  of  the  immediate  problem  with  too  little  care  being  given  to  the 
broader  relationship  between  economic  progress  in  general  and  the  railroad  prob- 
lem, between  the  operators  and  labor,  and  between  the  operators  and  the  general 
public.  In  other  words,  there  is  a demand  for  constructive  legislation,  rather 
than  an  application  of  care  to  restrictive  legislation  along. 

Hie  Transportation  Act  of  1820  contains  many  of  the  provisions  in  total  or 
in  part  of  the  proposals  presented,  yet  the  passage  of  1220  legislation  is  not 
the  concluding  record  of  the  plans  presented.  Hie  ideas  advocated  have  not  yet 
become  a matter  of  history.  The  1920  act  is  merely  a step  in  the  progress  of 
legislation,  succeeding  measures  of  which  shall  appropriate  more  of  the  logical 
and  approved  features  of  the  proposals  which  have  been  the  subject  of  this  thesis. 

Hie  promulgation  of  railroad  regulation  presents  momentous  problems  and 
difficulties  which  must  be  subjected  to  sincere  thought  and  careful  action. 

Above  all,  it  must  be  recognized  that  it  is  a great  problem,  the  settlement  of 


. 

. 


■ 

■ 


. 


. 


21 


which  will  have  an  immediate  and  an  ultimate  effect  upon  our  whole  national  life. 
Accordingly  our  progress  must  be  definite  and  constructive,  not  too  compromising, 
yet  not  too  severe;  a program  which  will  give  a due  and  just  consideration  to 
all  parties  concerned. 


BIBLIOGRAPHY 

Books 

Clark,  E.  E.  Clark  on  Interstate  Commerce.  (1219) . 

Hadley,  A.  T.  Railroad  Transportation.  (1885). 

Johnson,  E.  W.  and  Van  Metre,  T.  W.  Principles  of  Railroad  Tr ansr or t at i on . 

(1921) . 

National  Transportation  Conference.  (1912). 

Sharfman,  I.  L.  The  American  Railroad  Problem.  (1921). 

Periodicals 

American  Economic  Review,  v 9:392-8.  v 10:  Sup.  3-20,  185-212. 

Ann al s of  the  American  Academy  of  Political  and  Social  Science . November,  1919. 

v 85:  1-248. 

Commercial  and  Financial  Chronicle,  v 107:  2210,  2243-9,  2250-51,  2312,  2337-8, 

v 108:  1030-31,  733-4,  438. 

Forbes  Magazine,  v 3:  525. 

Independent . v 99:  343-4,  v 100:  229-30. 

Literary  Digest . v 62:  9-11. 

Nation,  v 109:  351,  2145. 

New  Republic,  v 20:  220-1,  332-40,  228-9. 

Outlook,  v 124:  363-4,  v 121:  52-3. 

Railway  Age,  v 56:  235-5,  483-6,  479-80,  578,  465-5. 

Railway  Carmen’ s Journal . v 24:  941-962. 

Railway  Review,  v 58:  532,  500. 

Review  of  Reviews r v 60:  595-6. 

Traffic  Yorld.  v 22:  1237,  v 23:  482-3,  404,  501-4,  482-3. 

Unpopular  Review,  v 9:  49-57. 


Pamphlets. 


Cook,  W.  V,r.  A Solution  of 

1919. 

Lovett,  R.  S.  Comments  on 


the  Railroad  Pi*  oh  lor,  in  Sight , pp.  1-30. 
the  Railroad  Problem,  pp.  3-76.  Hew  York, 


How  York, 
July , 1919. 


Documents. 

Hines,  1 V . D.  Extension  of  Tenure  of  Government  .-an -l  Control  of  Railroads . pp. 

3-134,  Interstate  Commerce  Committee  of  the  United  States 
Senate.  Government  Printing  Office,  1919. 

Senate  Hearings.  65th  Congress,  v 1:  231-1174.  (Before  the  Committee  on  Inter- 
state Commerce). 


Todd,  A.  II.  , Statement  of.  Public  Ownership  of  Roads,  pp.  3-44.  Government 

Printing  Office,  1919. 


